What drove State Street's revenue growth in 1993?

Revenue growth was driven mainly by fiduciary compensation, up 15% to $627.8 million, from growth in mutual fund and master trust/global custody business and new customers. Foreign exchange trading revenue rose 43% to $82.7 million on increased cross-border investing. Net interest revenue rose 14%, helped by growth in customer deposits.

Is State Street's balance sheet risky?

The balance sheet has low credit risk. Loans were only 14% of assets (versus over 55% at comparable banks), and about 72% of assets were investment securities and money market assets. The company is liability-sensitive in the short term, so rising rates would temporarily hurt net interest revenue. Its Tier 1 capital ratio of 12.1% was among the strongest for large U.S. banks.

Why did operating expenses increase so much, and will this continue?

Operating expenses rose 20% to $862.3 million, reflecting business growth, acquisitions, and deliberate investment spending on information technology, global processing infrastructure, and product development. Management said strategic investment spending would stay at about 10% of revenue through 1994, so expense growth is likely to remain elevated.

What are the main risks to State Street's earnings?

Key risks include falling interest rates, which reduce net interest revenue from non-interest-bearing deposits; pricing pressure on basic custody and accounting services for large asset pools; and dependence on mutual fund and global custody growth. Asset-based fees are partly tied to market values, though management estimated a 10% change in equity values would affect total revenue by less than 1%.

How much does State Street pay shareholders and how has the dividend changed?

Cash dividends declared were $0.52 per share in 1993, up from $0.445 in 1992, with payouts about 22% of net income. The quarterly dividend was raised twice during 1993, and the company has increased its dividend every six months for 15 years.

STT/STT-PG 10-K FY1993 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 1994. Cited figures are marked; the original filing is the authoritative source.

State Street Boston Corporation's 1993 10-K shows a fast-growing custody and fiduciary services franchise.

Total revenue rose 18% to about $1.16 billion^a, net income increased 12% to $179.8 million, and fully diluted EPS reached $2.33, up 13%. Return on equity was 17.4%, versus 18.1% in 1992, as management stepped up strategic investment spending to about 10% of revenue. Fee revenue, which made up 72% of total revenue, grew 19% to $833.4 million, led by fiduciary compensation of $627.8 million (up 15%).

Assets under custody reached $1.6 trillion^b (up 21%) and assets under management reached $142 billion (up 28%). The balance sheet is conservative and highly liquid. Total assets were $18.7 billion, with loans only 14% of assets, and the company is liability-sensitive in the short term.

Credit quality improved: net charge-offs fell to $16.3 million^c (0.63% of average loans), non-performing assets dropped to $37.9 million, and the loan loss allowance covered 2.03% of loans. The Tier 1 risk-based capital ratio was 12.1%, and the bank was well-capitalized. Net interest margin compressed to 2.08% from 2.14% as lower market rates outweighed balance-sheet growth.

For investors, the key tradeoffs are strong fee-driven growth and a fortress balance sheet against a lower margin, rising expense growth (operating expenses up 20%^d), and dependence on mutual fund and global custody flows. Management guided to continued double-digit EPS growth and continued strategic spending near 10% of revenue through 1994.

02—Key points

Key Highlights

Total revenue grew 18% to about $1.16 billion; fee revenue rose 19% to $833.4 million, making up 72% of total revenue.
Net income rose 12% to $179.8 million; fully diluted EPS was $2.33, up 13% from $2.07; ROE was 17.4%.
Assets under custody reached $1.6 trillion (up 21%), with mutual fund custody of $683 billion; the company is the largest U.S. mutual fund custodian with 37% of registered funds.
Assets under management rose 28% to $142 billion; the company is the largest manager of internationally indexed assets.
Credit quality improved: net charge-offs fell to $16.3 million (0.63% of average loans) and non-performing assets declined to $37.9 million.
Net interest margin fell to 2.08% from 2.14% as lower rates offset balance-sheet growth; operating expenses rose 20% to $862.3 million due to strategic investment spending.
Capital remained strong, with a Tier 1 risk-based ratio of 12.1% and a leverage ratio of 5.3%; the company paid a dividend of $0.52 per share, up 17%.

03—Questions

Frequently Asked Questions

What drove State Street's revenue growth in 1993?
Revenue growth was driven mainly by fiduciary compensation, up 15% to $627.8 million, from growth in mutual fund and master trust/global custody business and new customers. Foreign exchange trading revenue rose 43% to $82.7 million on increased cross-border investing. Net interest revenue rose 14%, helped by growth in customer deposits.
Is State Street's balance sheet risky?
The balance sheet has low credit risk. Loans were only 14% of assets (versus over 55% at comparable banks), and about 72% of assets were investment securities and money market assets. The company is liability-sensitive in the short term, so rising rates would temporarily hurt net interest revenue. Its Tier 1 capital ratio of 12.1% was among the strongest for large U.S. banks.
Why did operating expenses increase so much, and will this continue?
Operating expenses rose 20% to $862.3 million, reflecting business growth, acquisitions, and deliberate investment spending on information technology, global processing infrastructure, and product development. Management said strategic investment spending would stay at about 10% of revenue through 1994, so expense growth is likely to remain elevated.
What are the main risks to State Street's earnings?
Key risks include falling interest rates, which reduce net interest revenue from non-interest-bearing deposits; pricing pressure on basic custody and accounting services for large asset pools; and dependence on mutual fund and global custody growth. Asset-based fees are partly tied to market values, though management estimated a 10% change in equity values would affect total revenue by less than 1%.
How much does State Street pay shareholders and how has the dividend changed?
Cash dividends declared were $0.52 per share in 1993, up from $0.445 in 1992, with payouts about 22% of net income. The quarterly dividend was raised twice during 1993, and the company has increased its dividend every six months for 15 years.

04—Continue

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