In announcing third-quarter 2013 financial results, Joseph L. Hooley, State Street's chairman, president and chief executive officer, said, “Our results reflect the strength of our core business with operating-basis fee revenue up 9% from the third quarter of 2012, in a period impacted by the cyclical declines in market-driven revenue from a summer slowdown as well as the effect of the low interest-rate environment. Demand for our products, services, and solutions remains strong as evidenced by $200 billion of new asset servicing wins during the quarter. Compared to the third quarter of 2012, we achieved positive operating leverage, through our continued focus on controlling expenses across the organization and through the execution of our Business Operations and Information Technology Transformation program." Hooley continued, "We also continue to emphasize returning capital to shareholders. During the quarter, we purchased approximately $560 million of our common stock and have approximately $1.0 billion remaining under our March 2013 common stock purchase program authorizing the purchase of up to $2.1 billion of our common stock through March 31, 2014.” Third-Quarter 2013 GAAP Results
- Earnings per common share (EPS) of $1.17 decreased from $1.24 in the second quarter of 2013 and from $1.36 in the third quarter of 2012. The third quarter of 2012 included a net after-tax benefit of $0.35 per share, the majority of which pertained to recoveries associated with the 2008 Lehman Brothers bankruptcy.
- Net income available to common shareholders of $531 million decreased from $571 million in the second quarter of 2013 and from $654 million in the third quarter of 2012. The third quarter of 2012 included a net after-tax benefit of $166 million, the majority of which pertained to recoveries associated with the 2008 Lehman Brothers bankruptcy.
- Revenue of $2.43 billion decreased from $2.56 billion in the second quarter of 2013 and increased from $2.36 billion in the third quarter of 2012.
- Net interest revenue of $546 million decreased from $596 million in the second quarter of 2013 and from $619 million in the third quarter of 2012.
- Expenses of $1.72 billion decreased from $1.80 billion in the second quarter of 2013 and increased from $1.42 billion in the third quarter of 2012. Expenses in the third quarter of 2012 reflected a credit of $277 million, composed of recoveries of $362 million associated with the 2008 Lehman Brothers bankruptcy, partly offset by provisions for litigation exposure and other costs of $85 million.
- Return on average common shareholders' equity (ROE) of 10.8% decreased from 11.3% in the second quarter of 2013 and from 13.3% in the third quarter of 2012.
- EPS of $1.19 decreased from $1.24 in the second quarter of 2013 and increased from $0.99 in the third quarter of 2012.
- Net income available to common shareholders of $537 million decreased from $571 million in the second quarter of 2013 and increased from $473 million in the third quarter of 2012.
- Revenue of $2.47 billion decreased from $2.58 billion in the second quarter of 2013 and increased from $2.39 billion in the third quarter of 2012.
- Net interest revenue of $553 million decreased from $582 million in the second quarter of 2013 and from $611 million in the third quarter of 2012. Operating-basis net interest revenue excluded discount accretion on former conduit assets of $28 million, $47 million and $40 million for the respective quarters and is presented on a fully taxable-equivalent basis.
- Expenses of $1.69 billion decreased from $1.75 billion in the second quarter of 2013 and increased from $1.66 billion in the third quarter of 2012.
- ROE of 11.0% decreased from 11.3% in the second quarter of 2013 and increased from 9.6% in the third quarter of 2012.
- Achieved positive operating leverage(2) of 206 basis points compared to the third quarter of 2012. Comparing the first nine months of 2013 to the first nine months of 2012, we achieved positive operating leverage of 229 basis points.
- New business in asset servicing mandates during the quarter totaled $200 billion and net new assets to be managed were $(15) billion.(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 September 30, 2013 was 10.2% (standardized approach) and 11.3% (advanced approach), each calculated in conformity with the July 2013 final rule issued by the Federal Reserve. Under the final rule, we will be subject to the lower of these two Basel III tier 1 common ratios in the assessment of our capital adequacy for regulatory purposes.
- Capital distribution remains a priority with purchases of approximately $560 million of our common stock at an average price of $68.57 per share; in addition, as previously announced, we declared a quarterly common stock dividend of $0.26 per share.
The table below provides a summary of selected financial information and key ratios for the indicated periods, presented on an operating (non-GAAP) basis where noted. Amounts are presented in millions of dollars, except for per-share amounts or where otherwise noted.
|(Dollars in millions)||Q3 2013||Q2 2013||% Increase(Decrease)||Q3 2012||% Increase(Decrease)|
|Net income available to common shareholders(1)||537||571||(6.0||)||473||13.5|
|Earnings per common share(1)||1.19||1.24||(4.0||)||0.99||20.2|
|Return on average common equity(1)||11.0||%||11.3||%||(30) bps||9.6||%||140 bps|
|Total assets at period-end||$||217,180||$||227,300||(4.5||)%||$||204,522||6.2||%|
|Quarterly average total assets||201,282||207,694||(3.1||)||195,805||2.8|
|Net interest margin(1)||1.27||%||1.31||%||(4) bps||1.44||%||(17) bps|
|Net unrealized gain (loss) on investment securities,|
|after-tax at period-end||$||(79||)||$||(123||)||$||577|
|Assets Under Custody and Administration and Assets Under Management|
|(Dollars in billions)||Q3 2013||Q2 2013||% Increase(Decrease)||Q3 2012||% Increase(Decrease)|
|Assets under custody and administration(1) (2)||$||26,033||$||25,742||1.1||%||$||23,441||11.1||%|
|Assets under management(2)||2,241||2,146||4.4||2,065||8.5|
|S&P 500® daily average||1,675||1,609||4.1||1,401||19.6|
|MSCI EAFE® daily average||1,748||1,707||2.4||1,468||19.1|
|S&P 500® average of month-end||1,667||1,612||3.4||1,409||18.3|
|MSCI EAFE® average of month-end||1,747||1,698||2.9||1,474||18.5|
|(Dollars in millions)||Q3 2013||Q2 2013||% Increase(Decrease)||Q3 2012||% Increase(Decrease)|
|Trading services revenue:|
|Brokerage and other fees||109||125||(12.8||)||117||(6.8||)|
|Total trading services revenue||256||296||(13.5||)||232||10.3|
|Securities finance revenue||74||131||(43.5||)||91||(18.7||)|
|Processing fees and other revenue(1) (2)||103||100||3.0||84||22.6|
|Total fee revenue||1,920||2,005||(4.2||)||1,758||9.2|
|Net interest revenue(1) (3)||553||582||(5.0||)||611||(9.5||)|
|Gains (losses) related to investment securities, net||(4||)||(7||)||(42.9||)||18||(122.2||)|
|Total Operating-Basis Revenue(1)||$||2,469||$||2,580||(4.3||)%||$||2,387||3.4||%|
|(Dollars in millions)||Q3 2013||Q2 2013||% Increase(Decrease)||Q3 2012||% Increase(Decrease)|
|Compensation and employee benefits||$||903||$||917||(1.5||)%||$||916||(1.4||)%|
|Information systems and communications||235||235||—||211||11.4|
|Transaction processing services||185||186||(0.5||)||170||8.8|
|Total Operating-Basis Expenses(1)||$||1,687||$||1,753||(3.8||)%||$||1,664||1.4||%|
CapitalThe following table presents the company's capital ratios as of September 30, 2013, June 30, 2013 and September 30, 2012.
|Capital ratios(1)||September 30,2013||June 30, 2013||bps Increase(Decrease)||September 30,2012||bps Increase(Decrease)|
|Total capital ratio||19.8||%||19.1||%||70||bps||21.3||%||(150)||bps|
|Tier 1 capital ratio||17.3||16.6||70||19.8||(250)|
|Tier 1 leverage ratio||7.2||6.9||30||7.6||(40)|
|Tier 1 common ratio||15.5||14.9||60||17.8||(230)|
|Estimated pro forma Basel IIItier 1 common ratio:(2)|
(1) Unless otherwise specified, all capital ratios referenced in the table above and elsewhere in this news release refer to State Street and not State Street Bank and Trust Company. Refer to the addendum included with this news release for a further description of these ratios, and for reconciliations applicable to State Street's tier 1 common and tangible common equity, or TCE, ratios presented in this table.(2) On July 2, 2013, the Federal Reserve issued a rule intended to implement the Basel III framework in the U.S. The final rule consolidated, with revisions, three separate Notices of Proposed Rulemaking, or NPRs, originally issued by the Federal Reserve in June 2012. State Street's transition period with respect to the final rule has not yet commenced. Under the final rule, the lower of State Street’s tier 1 common ratio calculated under the Basel III advanced approach, referred to as the advanced approach, and under the Basel III standardized approach, referred to as the standardized approach, will be State Street’s effective tier 1 common ratio used in connection with the assessment of its capital adequacy for regulatory purposes. These calculations differ from calculations done in conformity with the June 2012 NPRs. The estimated pro forma Basel III tier 1 common ratios presented in the table above as of September 30, 2013 and June 30, 2013 are preliminary estimates by State Street, calculated in conformity with the advanced and standardized approaches in the July 2013 final rule. Each of these calculations reflects tier 1 common equity calculated under the final rule as applicable on its January 1, 2014 effective date and is based on State Street's present interpretations, expectations and understanding of the final rule as of the respective date of each estimate’s first public announcement. The estimated pro forma Basel III tier 1 common ratio presented in the table above as of September 30, 2012 was a preliminary estimate by State Street, calculated in conformity with the advanced approach in the June 2012 NPRs, and was based on State Street's interpretations, expectations and understanding of the June 2012 NPRs as of the date of the estimate’s first public announcement. This calculation differs from the calculation of the estimated pro forma Basel III tier 1 common ratio done in conformity with the July 2013 final rule, and State Street has not revised its calculation done in conformity with the June 2012 NPRs. State Street did not announce its estimated pro forma Basel III tier 1 common ratio calculated in conformity with the standardized approach as of September 30, 2012.
The estimated pro forma Basel III tier 1 common ratios as of September 30, 2013, June 30, 2013 and September 30, 2012, calculated in conformity with the advanced approach in the July 2013 final rule (or, with respect to the September 30, 2012 estimate, in the June 2012 NPRs), reflect calculations and determinations with respect to State Street's capital and related matters as of September 30, 2013 June 30, 2013 and September 30, 2012, respectively, 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 for those purposes as of the respective date of each estimate’s first public announcement. Significant components of these advanced systems involve the exercise of judgment by State Street and its regulators, and these 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.Common Stock Dividend and Share Purchase Program We purchased approximately 8.2 million shares of our common stock at a total cost of approximately $560 million and an average price of $68.57 per share in the third quarter of 2013 and, as previously announced, also declared a quarterly common stock dividend of $0.26 per share.
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, Tuesday, October 22, 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 inside the U.S. or at +1 706/679-5594 outside of the U.S. The Conference ID is # 64597123. Recorded replays of the conference call will be available on the website, 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 # 64597123. 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 $26.03 trillion in assets under custody and administration and $2.24 trillion* in assets under management as of September 30, 2013, State Street operates globally in more than 100 geographic markets and employs 29,230 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 $38.6 billion as of September 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," "outlook," "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 October 22, 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.