In announcing today's financial results, Joseph L. Hooley, State Street's chairman, president and chief executive officer, said, “We reported a strong second quarter with revenue growth driven by new business and improved equity markets. Seasonal factors and increased market volatility benefited our securities finance and foreign exchange businesses. The second-quarter results also reflected our continued success in realizing the expected benefits from our Business Operations and Information Technology Transformation program and ongoing expense management. Importantly, we achieved positive operating leverage compared to both the first quarter of 2013 and the second quarter of 2012. We remain focused on returning capital to our shareholders. During the second quarter of 2013, we purchased approximately $560 million of our common stock and have approximately $1.5 billion remaining on our March 2013 common stock purchase program authorizing the purchase of up to $2.1 billion of our common stock through March 31, 2014." Second-Quarter 2013 GAAP Results
- Earnings per common share (EPS) of $1.24 increased from $0.98 in both the first quarter of 2013 and the second quarter of 2012. EPS in the first quarter of 2013 reflected the effects of $118 million of equity incentive compensation expense, or $0.19 per share, for retirement-eligible employees and payroll taxes.
- Net income available to common shareholders of $571 million increased from $455 million in the first quarter of 2013 and increased from $480 million in the second quarter of 2012.
- Revenue of $2.56 billion increased from $2.44 billion in the first quarter of 2013 and increased from $2.42 billion in the second quarter of 2012.
- Net interest revenue of $596 million increased from $576 million in the first quarter of 2013 and decreased from $672 million in the second quarter of 2012.
- Expenses of $1.80 billion decreased from $1.83 billion in the first quarter of 2013 and increased from $1.77 billion in the second quarter of 2012.
- Return on average common shareholders' equity (ROE) of 11.3% increased from 9.1% in the first quarter of 2013 and increased from 10.0% in the second quarter of 2012.
- EPS of $1.24 increased 29% from $0.96 in the first quarter of 2013 and increased 23% from $1.01 in the second quarter of 2012. EPS in the first quarter of 2013 reflected the effects of $118 million of equity incentive compensation expense, or $0.19 per share, for retirement-eligible employees and payroll taxes.
- Net income available to common shareholders of $571 million increased from $443 million in the first quarter of 2013 and increased from $494 million in the second quarter of 2012.
- Revenue of $2.58 billion increased from $2.47 billion in the first quarter of 2013 and increased from $2.46 billion in the second quarter of 2012.
- Net interest revenue on an operating basis was $582 million in the second quarter of 2013, an increase from $577 million in the first quarter of 2013, and a decrease from $629 million in the second quarter of 2012. Net interest revenue on an operating basis excluded discount accretion of $47 million, $31 million, and $74 million for the quarters ended June 30, 2013, March 31, 2013, and June 30, 2012, respectively.
- Expenses of $1.75 billion decreased from $1.81 billion in the first quarter of 2013 and increased from $1.73 billion in the second quarter of 2012.
- ROE of 11.3% increased from 8.9% in the first quarter of 2013 and from 10.3% in the second quarter of 2012.
- Achieved positive operating leverage(2) of 771 basis points and 347 basis points compared to the first quarter of 2013 and the second quarter of 2012, respectively. Excluding the effect of expenses related to equity incentive compensation for retirement-eligible employees and payroll taxes recorded in the first quarter of 2013, we achieved positive operating leverage of 97 basis points compared to the first quarter of 2013.
- New business during the quarter totaled $201 billion in asset servicing mandates and, excluding the SPDR® Gold ETF, $11 billion in net new assets to be managed at SSgA.(3)
- Business Operations and Information Technology Transformation program(4) is on track to achieve total incremental estimated pre-tax expense savings in 2013 of approximately $220 million.
- Capital(5) Estimated pro forma Basel III tier 1 common ratio as of June 30, 2013 was 10.0% (standardized approach) and 10.9% (advanced approach), each calculated in conformity with the July 2013 final rule approved by the Federal Reserve. Under the final rule, we expect to manage to the lower of these two Basel III tier 1 common ratios.
- Capital distribution remains a priority with purchases of approximately $560 million of our common stock at an average price of $65.73 per share; in addition, we declared a previously announced quarterly common stock dividend of $0.26 per share.
The table below provides a summary of selected financial information and key ratios for the indicated periods, presented on an operating (non-GAAP) basis where noted. Amounts are presented in millions of dollars, except for per-share amounts or where otherwise noted.
|(Dollars in millions)||Q2 2013||Q1 2013||% Increase(Decrease)||Q2 2012||% Increase(Decrease)|
|Net income available to common shareholders(1)||571||443||28.9||494||15.6|
|Earnings per common share(1)||1.24||0.96||29.2||1.01||22.8|
|Return on average common equity(1)||11.3||%||8.9||%||240 bps||10.3||%||100 bps|
|Total assets at period-end||$||227,300||$||218,189||4.2||%||$||200,777||13.2||%|
|Quarterly average total assets||207,694||208,265||(0.3||)||189,095||9.8|
|Net interest margin(1)||1.31||%||1.31||%||—||1.54||%||(23) bps|
|Net unrealized gain (loss) on investment securities, after-tax at period-end||$||(123||)||$||817||$||(54||)|
|Assets Under Custody and Administration and Assets Under Management|
|(Dollars in billions)||Q2 2013||Q1 2013||% Increase(Decrease)||Q2 2012||% Increase(Decrease)|
|Assets under custody and administration(1) (2)||$||25,742||$||25,422||1.3||%||$||22,423||14.8||%|
|Assets under management(2)||2,146||2,176||(1.4||)||1,908||12.5|
|S&P 500® daily average||1,609||1,514||6.3||1,350||19.2|
|MSCI EAFE® daily average||1,707||1,668||2.3||1,427||19.6|
|S&P 500® average of month-end||1,612||1,527||5.6||1,357||18.8|
|MSCI EAFE® average of month-end||1,698||1,676||1.3||1,424||19.2|
|(Dollars in millions)||Q2 2013||Q1 2013||% Increase(Decrease)||Q2 2012||% Increase(Decrease)|
|Trading services revenue:|
|Brokerage and other fees||125||135||(7.4||)||126||(0.8||)|
|Total trading services revenue||296||281||5.3||255||16.1|
|Securities finance revenue||131||78||67.9||143||(8.4||)|
|Processing fees and other revenue(1) (2)||100||94||6.4||81||23.5|
|Net interest revenue(1) (3)||582||577||0.9||629||(7.5||)|
|Gains (Losses) related to investment securities, net||(7||)||2||(450.0||)||19||(136.8||)|
|Total Operating-Basis Revenue(1)||$||2,580||$||2,470||4.5||%||$||2,459||4.9||%|
|(Dollars in millions)||Q2 2013||Q1 2013||% Increase(Decrease)||Q2 2012||% Increase(Decrease)|
|Compensation and employee benefits(1)||$||917||$||1,035||(11.4||)%||$||942||(2.7||)%|
|Information systems and communications||235||237||(0.8||)||208||13.0|
|Transaction processing services||186||180||3.3||172||8.1|
|Total Operating-Basis Expenses(2)||$||1,753||$||1,812||(3.3||)%||$||1,728||1.4||%|
|Capital ratios(1)||June 30,2013||March 31,2013||bps Increase(Decrease)||June 30,2012||bps Increase(Decrease)|
|Total capital ratio||19.1||%||19.2||%||(10||) bps||21.5||%||(240||) bps|
|Tier 1 capital ratio||16.6||18.0||(140||)||19.9||(330||)|
|Tier 1 leverage ratio||6.9||6.9||—||7.7||(80||)|
|Tier 1 common ratio||14.9||16.1||(120||)||17.9||(300||)|
|Estimated pro forma Basel III tier 1 common ratio(2)||10.0||10.6||11.0|
The estimated pro forma Basel III tier 1 common ratio as of June 30, 2013, calculated pursuant to the advanced approach in conformity with the July 2013 final rule, reflects calculations and determinations with respect to State Street's capital and related matters as of June 30, 2013, based on State Street and external data, quantitative formulae, statistical models, historical correlations and assumptions, collectively referred to as “advanced systems,” in effect and used by State Street's advanced systems for those purposes as of July 19, 2013. Significant components of these advanced systems involve the exercise of judgment by State Street and its regulators, and its advanced systems may not accurately represent or calculate the scenarios, circumstances, outputs or other results for which they are designed or intended. Due to the influence of changes in these advanced systems, whether resulting from changes in data inputs, regulation or regulatory supervision or interpretation, State Street-specific or market activities or experiences or other updates or factors, State Street expects that its advanced systems and its capital ratios calculated in conformity with the Basel III framework will change and may be volatile over time, and that those latter changes or volatility could be material as calculated and measured from period to period. Refer to the addendum included with this news release for information concerning the specified capital ratios and for reconciliations of State Street's estimated pro forma Basel III tier 1 common ratios to the tier 1 common ratio calculated using currently applicable regulatory requirements under Basel I rules.The following table presents the primary elements of the transition, as described in note (2) to the preceding table, from State Street's March 31, 2013 presentation of its estimated pro forma Basel III tier 1 common ratio, calculated in conformity with the June 2012 NPRs (advanced approach), to the estimated pro forma Basel III tier 1 common ratio as of June 30, 2013, calculated in conformity with the July 2013 Basel III final rule (advanced approach):
|Estimated tier 1 common equity ratio under June 2012 Basel III NPRs as of March 31, 2013||10.6||%|
|Capital generation, net of common stock purchases and dividends||— bps|
|Change in risk-weighted assets||(5||)|
|Impact of July 2013 final rule:|
|Treatment of accumulated other comprehensive income||(5||)|
|Estimated tier 1 common equity ratio under July 2013 Basel III final rule as of June 30, 2013||10.9||%|
Additional InformationAll earnings per share amounts represent fully diluted earnings per common share. Return on average common shareholders' equity is determined by dividing annualized net income available to common equity by average common shareholders' equity for the period. Operating-basis return on average common equity utilizes annualized operating-basis net income available to common equity in the calculation. Investor Conference Call State Street will webcast an investor conference call today, Friday, July 19, 2013, at 9:30 a.m. EDT, available at www.statestreet.com/stockholder. The conference call will also be available via telephone, at +1 888/391-4233 in the U.S. or at +1 706/679-5594 outside of the U.S. The Conference ID is #95866201. Recorded replays of the conference call will be available on the web site, and by telephone at +1 855/859-2056 inside the U.S. or at +1 404/537-3406 outside the U.S. beginning approximately two hours after the call's completion. The Conference ID is #95866201. The telephone replay will be available for approximately two weeks following the conference call. This news release, presentation materials referred to on the conference call (including those concerning our investment portfolio), and additional financial information are available on State Street's website, at www.statestreet.com/stockholder under “Investor Relations--Investor News & Events" and under the title “Events and Presentations.” State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $25.74 trillion in assets under custody and administration and $2.15 trillion* in assets under management as of June 30, 2013, State Street operates globally in more than 100 geographic markets and employs 29,225 worldwide. For more information, visit State Street's website at www.statestreet.com or call +1 877/639-7788 [NEWS STT] toll-free in the United States and Canada, or +1 678/999-4577 outside those countries. * Assets under management include the assets of the SPDR® Gold ETF (approximately $37.1 billion as of June 30, 2013), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the distribution agent. Forward-Looking Statements This news release contains forward-looking statements as defined by United States securities laws, including statements relating to our goals and expectations regarding our business, financial and capital condition, results of operations, investment portfolio performance and strategies, the financial and market outlook, governmental and regulatory initiatives and developments, and the business environment. Forward-looking statements are often, but not always, identified by such forward-looking terminology as "plan," "expect," "look," "believe," "anticipate," "estimate," "seek," "may," "will," "trend," "target," "strategy" and "goal," or similar statements or variations of such terms. These statements are not guarantees of future performance, are inherently uncertain, are based on current assumptions that are difficult to predict and involve a number of risks and uncertainties. Therefore, actual outcomes and results may differ materially from what is expressed in those statements, and those statements should not be relied upon as representing our expectations or beliefs as of any date subsequent to July 19, 2013.
Important factors that may affect future results and outcomes include, but are not limited to:
- the financial strength and continuing viability of the counterparties with which we or our clients do business and to which we have investment, credit or financial exposure, including, for example, the direct and indirect effects on counterparties of the current sovereign-debt risks in Europe and other regions;
- financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other regions;
- increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets;
- the liquidity of the U.S. and international securities markets, particularly the markets for fixed- income securities and inter-bank credits, and the liquidity requirements of our clients;
- the level and volatility of interest rates and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally;
- the credit quality, credit-agency ratings and fair values of the securities in our investment securities portfolio, a deterioration or downgrade of which could lead to other-than-temporary impairment of the respective securities and the recognition of an impairment loss in our consolidated statement of income;
- our ability to attract deposits and other low-cost, short-term funding, and our ability to deploy deposits in a profitable manner consistent with our liquidity requirements and risk profile;
- the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement the Dodd-Frank Act, the Basel II and Basel III capital and liquidity standards, and European legislation with respect to the levels of regulatory capital we must maintain, our credit exposure to third parties, margin requirements applicable to derivatives, banking and financial activities and other regulatory initiatives in the U.S. and internationally, including regulatory developments that result in changes to our structure or operating model, increased costs or other changes to how we provide services;
- adverse changes in the regulatory capital ratios that we are required to meet, whether arising under the Dodd-Frank Act, the Basel II or Basel III capital and liquidity standards or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in calculating our capital ratios that cause changes in those ratios as they are measured from period to period;
- increasing requirements to obtain the prior approval of the Federal Reserve or our other regulators for the use, allocation or distribution of our capital or other specific capital actions or programs, including acquisitions, dividends and equity purchases, without which our growth plans, distributions to shareholders, equity purchase programs or other capital initiatives may be restricted;
- changes in law or regulation that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including additional or increased taxes or assessments thereon, capital adequacy requirements, margin requirements and changes that expose us to risks related to the adequacy of our controls or compliance programs;
- our ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meet our expectations or those of our clients and our regulators;
- the credit agency ratings of our debt and depository obligations and investor and client perceptions of our financial strength;
- delays or difficulties in the execution of our previously announced Business Operations and Information Technology Transformation program, which could lead to changes in our estimates of the charges, expenses or savings associated with the planned program and may cause volatility of our earnings;
- the results of, and costs associated with, government investigations, litigation, and similar claims, disputes, or proceedings;
- the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the possibility of significant reductions in the valuation of assets underlying those pools;
- adverse publicity or other reputational harm;
- dependencies on information technology, complexities and costs of protecting the security of our systems and difficulties with protecting our intellectual property rights;
- our ability to grow revenue, control expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements;
- potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation, and perceptions of State Street as a suitable service provider or counterparty;
- potential changes in how and in what amounts clients compensate us for our services, and the mix of services provided by us that clients choose;
- the ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
- the risks that acquired businesses and joint ventures will not achieve their anticipated financial and operational benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that expected synergies will not be achieved or unexpected disynergies will be experienced, that client and deposit retention goals will not be met, that other regulatory or operational challenges will be experienced and that disruptions from the transaction will harm our relationships with our clients, our employees or regulators;
- our ability to recognize emerging needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and the potential for new products and services to impose additional costs on us and expose us to increased operational risk;
- our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products;
- our ability to control operating risks, data security breach risks, information technology systems risks and outsourcing risks, and our ability to protect our intellectual property rights, the possibility of errors in the quantitative models we use to manage our business and the possibility that our controls will prove insufficient, fail or be circumvented;
- changes in accounting standards and practices; and
- changes in tax legislation and in the interpretation of existing tax laws by U.S. and non-U.S. tax authorities that affect the amount of taxes due.