In announcing today's financial results, Joseph L. Hooley, State Street's chairman, president and chief executive officer, said, "We are pleased with our solid second-quarter revenue growth driven by stronger global equity markets, net new business and the seasonal benefit from securities finance activity." "We continue to see strong demand for our products and services as evidenced by our second quarter new business wins which were $250 billion in asset servicing and $18 billion in net new assets to be managed. We also have a robust and well-diversified new business pipeline." "Despite our solid performance, we remain cautious about the overall environment given the continued low levels of interest rates and volatility, and the ongoing pressure of regulatory compliance costs." "We also continue to prioritize returning capital to our shareholders through dividends and purchases of our common stock. During the second quarter of 2014, we purchased approximately $410 million of our common stock and ended the second quarter with approximately $1.3 billion remaining under our March 2014 common stock purchase program authorizing the purchase of up to $1.7 billion of our common stock through March 31, 2015. We also increased our common stock dividend for the quarter to $0.30 per share." Second-Quarter 2014 GAAP Results
- Earnings per common share (EPS) of $1.38 increased from $0.81 in the first quarter of 2014 and from $1.24 in the second quarter of 2013. The comparison with the first quarter reflects the seasonal deferred incentive compensation expense for retirement-eligible employees and payroll taxes in the first quarter of 2014, as well as the seasonal increase in second-quarter 2014 securities finance revenue.
- Net income available to common shareholders of $602 million increased from $356 million in the first quarter of 2014 and from $571 million in the second quarter of 2013.
- Revenue of $2.60 billion increased from $2.49 billion in the first quarter of 2014 and from $2.56 billion in the second quarter of 2013.
- Net interest revenue of $561 million increased from $555 million in the first quarter of 2014 and decreased from $596 million in the second quarter of 2013.
- Expenses of $1.85 billion decreased from $2.03 billion in the first quarter of 2014 and increased from $1.80 billion in the second quarter of 2013.
- Return on average common shareholders' equity (ROE) of 11.9% increased from 7.2% in the first quarter of 2014 and from 11.3% in the second quarter of 2013.
- EPS of $1.39 increased from $0.99 in the first quarter of 2014 and increased from $1.24 in the second quarter of 2013. The comparison with the first quarter reflects the seasonal deferred incentive compensation expense for retirement-eligible employees and payroll taxes in the first quarter of 2014, as well as the seasonal increase in second-quarter 2014 securities finance revenue.
- Net income available to common shareholders of $603 million increased from $433 million in the first quarter of 2014 and from $571 million in the second quarter of 2013.
- Revenue of $2.68 billion increased from $2.56 billion in the first quarter of 2014 and from $2.58 billion in the second quarter of 2013.
- Net interest revenue of $575 million increased from $572 million in the first quarter of 2014 and decreased from $582 million in the second quarter of 2013. Operating-basis net interest revenue excluded discount accretion on former conduit securities of $28 million, $27 million and $47 million for the second quarter of 2014, the first quarter of 2014, and the second quarter of 2013, respectively. All quarters are presented on a fully taxable-equivalent basis.
- Expenses of $1.82 billion decreased from $1.92 billion in the first quarter of 2014 and increased from $1.75 billion in the second quarter of 2013.
- ROE of 11.9% increased from 8.8% in the first quarter of 2014 and from 11.3% in the second quarter of 2013.
- New business2 New asset servicing mandates during the second quarter of 2014 totaled $250 billion and net new assets to be managed were $18 billion.
- Business Operations and Information Technology Transformation program3 Remains on track to achieve $575 million to $625 million in annualized pre-tax expense savings by 2015.
- Capital4 Our tier 1 common ratio as of June 30, 2014, calculated under the advanced approach in conformity with the Basel III final rule, was 12.8%. Our estimated pro forma Basel III tier 1 common ratio as of June 30, 2014, calculated under the standardized approach in conformity with the Basel III final rule, was 11.3%.
- Return of capital to shareholders Purchased approximately $410 million of our common stock at an average price of $65.02 per share and declared a quarterly common stock dividend of $0.30 per share in the second quarter of 2014.
The table below provides a summary of selected financial information and key ratios for the indicated periods, presented on an operating, or non-GAAP, basis where noted. Amounts are presented in millions of dollars, except for per-share amounts or where otherwise noted.
|(Dollars in millions)||Q2 2014||Q1 2014||% Increase(Decrease)||Q2 2013||% Increase(Decrease)|
|Net income available to common shareholders1||603||433||39.3||571||5.6|
|Earnings per common share1||1.39||.99||40.4||1.24||12.1|
|Return on average common equity1||11.9||%||8.8||%||310 bps||11.3||%||60 bps|
|Total assets as of period-end||$||282,324||$||256,663||10.0||%||$||227,300||24.2||%|
|Quarterly average total assets||234,664||215,569||8.9||207,694||13.0|
|Net interest margin1||1.12||%||1.24||%||(12) bps||1.31||%||(19) bps|
|Net unrealized gains (losses) on investment securities, after-tax, as of period-end||$||456||$||124||$||(123||)|
|Assets Under Custody and Administration and Assets Under Management|
|(Dollars in billions)||Q2 2014||Q1 2014||% Increase(Decrease)||Q2 2013||% Increase(Decrease)|
|Assets under custody and administration1, 2||$||28,400||$||27,477||3.4||%||$||25,742||10.3||%|
|Assets under management2||2,480||2,381||4.2||2,146||15.6|
|S&P 500® daily average||1,900||1,835||3.5||1,609||18.1|
|MSCI EAFE® daily average||1,942||1,894||2.5||1,707||13.8|
|S&P 500® average of month-end||1,923||1,838||4.6||1,612||19.3|
|MSCI EAFE® average of month-end||1,955||1,896||3.1||1,698||15.1|
|(Dollars in millions)||Q2 2014||Q1 2014||% Increase(Decrease)||Q2 2013||% Increase(Decrease)|
|Trading services revenue:|
|Brokerage and other fees2||116||119||(2.5||)||133||(12.8||)|
|Total trading services revenue||260||253||2.8||304||(14.5||)|
|Securities finance revenue||147||85||72.9||131||12.2|
|Processing fees and other revenue1, 2, 3||108||113||(4.4||)||92||17.4|
|Total fee revenue1, 2, 3||2,103||1,981||6.2||2,005||4.9|
|Net interest revenue1, 4||575||572||0.5||582||(1.2||)|
|Gains (losses) related to investment securities, net||(2||)||6||(133.3||)||(7||)||(71.4||)|
|Total Operating-Basis Revenue1||$||2,676||$||2,559||4.6||%||$||2,580||3.7||%|
|(Dollars in millions)||Q2 2014||Q1 2014||% Increase(Decrease)||Q2 2013||% Increase(Decrease)|
|Compensation and employee benefits1, 2||$||974||$||1,085||(10.2||)%||$||917||6.2||%|
|Information systems and communications||244||244||—||235||3.8|
|Transaction processing services||193||191||1.0||186||3.8|
|Total Operating-Basis Expenses1||$||1,818||$||1,917||(5.2||)%||$||1,753||3.7||%|
CapitalIn July 2013, the Federal Reserve issued a final rule intended to implement the Basel III framework in the U.S., referred to as the Basel III final rule. Provisions of the Basel III final rule become effective under a transition timetable which began on January 1, 2014. On February 21, 2014, we were notified by the Federal Reserve that we completed our Basel III qualification period and would be required to begin using the advanced approaches framework provided in the Basel III final rule in the determination of our risk-based capital requirements. Pursuant to this notification, we used the advanced approaches framework to calculate our regulatory capital ratios beginning with the second quarter of 2014. For the remainder of 2014, including the second quarter of 2014, the lower of our regulatory capital ratios calculated under the Basel III advanced approach and those ratios calculated under the transitional provisions of Basel III will apply in the assessment of our capital adequacy for regulatory purposes. Once the provisions of the Basel III final rule are fully implemented effective January 1, 2015, the lower of the Basel III regulatory capital ratios calculated by us under the Basel III advanced approach and the Basel III standardized approach will apply in the assessment of our capital adequacy for regulatory purposes. The following table presents our regulatory capital ratios as of June 30, 2014. Refer to the addendum included with this news release for a further description of these ratios, and for a reconciliation applicable to State Street's tangible common equity, or TCE, ratio presented in the table. All capital ratios presented in the table and elsewhere in this news release refer to State Street Corporation and not State Street Bank and Trust Company.
|Capital ratios||Basel IIIAdvancedApproachJune 30, 20141||Basel IIITransitionalJune 30, 20142|
|Total capital ratio||16.1%||20.2%|
|Tier 1 capital ratio||14.1||17.7|
|Tier 1 common ratio||12.8||16.0|
|Tier 1 leverage ratio||6.9||6.9|
The advanced approaches ratios (actual and estimated) presented in this news release reflect calculations and determinations with respect to our capital and related matters, 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 us for those purposes as of the respective date of each ratio’s first public announcement. Significant components of these advanced systems involve the exercise of judgment by us and our 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, we expect that our advanced systems and our 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 our pro forma Basel III tier 1 common ratios calculated under the advanced and standardized approaches, and for reconciliations of these estimated pro forma ratios to our tier 1 common ratio calculated under then currently applicable regulatory requirements. Additional Information All 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. Operating leverage is defined as the rate of growth of total revenue less the rate of growth of total expenses, each as determined on an operating basis.
Investor Conference CallState Street will webcast an investor conference call today, Tuesday, July 22, 2014, at 9:30 a.m. EDT, available at www.statestreet.com/stockholder. The conference call will also be available via telephone, at +1 877/423-4013 inside the U.S. or at +1 706/679-5594 outside of the U.S. The Conference ID is # 58546215. 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 # 58546215. 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 $28.40 trillion in assets under custody and administration and $2.48 trillion* in assets under management as of June 30, 2014, State Street operates globally in more than 100 geographic markets and employs 29,420 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 $33 billion as of June 30, 2014), 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, dividend and stock purchase programs, 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 “expect,” “objective,” “intend,” “plan,” “forecast,” “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 July 22, 2014.
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 sovereign-debt risks in the U.S., Europe and other regions;
- increases in the volatility of, or declines in the level of, our net interest revenue, changes in the composition or valuation 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 changes to the Basel III capital framework and European legislation, such as the Alternative Investment Fund Managers Directive and Undertakings for Collective Investment in Transferable Securities Directives, 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 or will be required to meet, whether arising under the Dodd-Frank Act or the 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 the calculation of 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, or the enforcement of 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;
- financial market disruptions or economic recession, whether in the U.S., Europe, Asia or other regions;
- our ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meet our expectations and those of our clients and our regulators;
- the results of, and costs associated with, government investigations, litigation and similar claims, disputes, or proceedings;
- 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 potential for losses arising from our investments in sponsored investment funds;
- 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 liquidity or valuation of assets underlying those pools;
- our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products;
- the credit agency ratings of our debt and depository obligations and investor and client perceptions of our financial strength;
- adverse publicity, whether specific to State Street or regarding other industry participants or industry-wide factors, or other reputational harm;
- our ability to control operational risks, data security breach 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;
- dependencies on information technology and our ability to control related risks, including cyber-crime and other threats to our information technology infrastructure and systems and their effective operation both independently and with external systems, and complexities and costs of protecting the security of our systems and data;
- 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;
- changes or 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;
- changes or 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;
- our 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 our 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 negative synergies 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;
- 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.