How did State Street's profitability and per-share earnings change in 1995?

Net income rose 12% to $247.1 million, and fully diluted EPS increased 12% to $2.95 from $2.64. Return on equity was 16.7%, below the company's 18% target. Revenue growth of 11% outpaced the 8% growth in the interest and fee figures, aided by new business and higher foreign exchange activity.

What is driving State Street's revenue, and how dependent is it on fees versus interest income?

The business is fee-driven: fees made up 71% of total revenue in 1995. Fiduciary compensation from custody, accounting, and investment services is the largest component at $823.8 million. Net interest revenue is a smaller contributor at $464.3 million on a taxable-equivalent basis, and it is sensitive to interest rate spreads.

Were there any risks or pressures on the business in 1995?

Yes. Net interest margin declined to 2.01% from 2.09% because of a flatter and inverted yield curve, and the spread between rates earned and paid narrowed to 1.21%. Operating expenses rose 11%, and the company continued elevated investment spending. Management also notes sensitivity to customer internalization of services, pricing pressure, and changes in securities market values, though a 10% change in equity values would move total revenue by only about 1%.

How strong is State Street's balance sheet and capital position?

The balance sheet is large at $25.8 billion in total assets, but about 72% is in investment securities and money market assets, and loans are only 15% of assets. Credit risk is low, with non-performing loans below 0.4% of total loans. Capital is strong, with stockholders' equity of $1.59 billion, a Tier 1 risk-based capital ratio of 14.0%, and a leverage ratio of 5.6%, well above regulatory guidelines.

What is the outlook for 1996 according to the filing?

Management expects revenue growth from business won in the second half of 1995 and anticipates credit quality to stay at current levels, with gross charge-offs roughly equal to 1995. The 1996 effective tax rate is estimated at 35.5%, up from an adjusted 34.5% in 1995. Management says it is optimistic about long-term prospects, though the filing notes that future results depend on factors including cross-border investing, market values, interest rates, and competition.

STT/STT-PG 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 1996. Cited figures are marked; the original filing is the authoritative source.

State Street Boston Corporation (STT) reported a solid 1995 for its fiscal year ended December 31, 1995.

Net income rose 12% to $247.1 million^a, and fully diluted EPS grew 12% to $2.95, while total revenue increased 11% to $1,575.4 million. Return on equity was 16.7%, slightly below the company's 18% goal. Growth was driven primarily by its financial asset services franchise, which contributed 65% of net income, with fee revenue making up 71% of total revenue.

Fee revenue rose 10% to $1.12 billion^b, led by fiduciary compensation (up 10%), foreign exchange trading (up 24%), and service fees (up 23%), partly offset by a 20% decline in processing service fees. The company is a dominant custodian and servicer of financial assets, with $2.3 trillion in assets under custody (up 32%), $1 trillion in mutual fund assets under custody (41% of U.S. registered funds), and $226 billion in assets under management (up 41%). Management noted that net interest revenue was pressured by a flatter and inverted Treasury yield curve, and the net interest margin fell to 2.01% from 2.09%.

Operating expenses rose 11% to $1.17 billion^c as the company continued strategic investment spending, which management says has returned to a more normal level of about 8% of revenue by year-end. Credit quality improved further: net charge-offs fell to $2.7 million (0.07% of average loans) from $7.7 million, and non-performing assets declined to $18.7 million. Capital remained strong, with a Tier 1 risk-based ratio of 14.0% and a leverage ratio of 5.6%.

Management expects credit quality to remain at current levels in 1996 and guided to a 1996 effective tax rate of about 35.5%^d. The 1995 results were helped by several nonrecurring tax items that lowered the effective rate to 32.6% (34.5% excluding them).

02—Key points

Key Highlights

Net income increased 12% to $247.1 million; fully diluted EPS rose 12% to $2.95, and total revenue grew 11% to $1.58 billion.
Fee revenue, 71% of total revenue, grew 10% to $1.12 billion, led by fiduciary compensation of $823.8 million (up 10%) and foreign exchange trading of $140.7 million (up 24%).
Assets under custody reached $2.3 trillion (up 32%), with the company ranked as the largest U.S. mutual fund custodian; assets under management rose 41% to $226.5 billion.
Net interest margin compressed to 2.01% from 2.09% amid a flat, partly inverted yield curve, though average interest-earning assets grew 16% to $23.1 billion.
Credit quality improved: net charge-offs fell to $2.7 million (0.07% of average loans) and non-performing assets dropped to $18.7 million.
Strong capital position with a Tier 1 risk-based ratio of 14.0%, a leverage ratio of 5.6%, and book value per share up to $19.27 from $16.22.
Operating expenses rose 11% to $1.17 billion, but the effective tax rate fell to 32.6% due to nonrecurring items; the 1996 rate is expected to be about 35.5%.

03—Questions

Frequently Asked Questions

How did State Street's profitability and per-share earnings change in 1995?
Net income rose 12% to $247.1 million, and fully diluted EPS increased 12% to $2.95 from $2.64. Return on equity was 16.7%, below the company's 18% target. Revenue growth of 11% outpaced the 8% growth in the interest and fee figures, aided by new business and higher foreign exchange activity.
What is driving State Street's revenue, and how dependent is it on fees versus interest income?
The business is fee-driven: fees made up 71% of total revenue in 1995. Fiduciary compensation from custody, accounting, and investment services is the largest component at $823.8 million. Net interest revenue is a smaller contributor at $464.3 million on a taxable-equivalent basis, and it is sensitive to interest rate spreads.
Were there any risks or pressures on the business in 1995?
Yes. Net interest margin declined to 2.01% from 2.09% because of a flatter and inverted yield curve, and the spread between rates earned and paid narrowed to 1.21%. Operating expenses rose 11%, and the company continued elevated investment spending. Management also notes sensitivity to customer internalization of services, pricing pressure, and changes in securities market values, though a 10% change in equity values would move total revenue by only about 1%.
How strong is State Street's balance sheet and capital position?
The balance sheet is large at $25.8 billion in total assets, but about 72% is in investment securities and money market assets, and loans are only 15% of assets. Credit risk is low, with non-performing loans below 0.4% of total loans. Capital is strong, with stockholders' equity of $1.59 billion, a Tier 1 risk-based capital ratio of 14.0%, and a leverage ratio of 5.6%, well above regulatory guidelines.
What is the outlook for 1996 according to the filing?
Management expects revenue growth from business won in the second half of 1995 and anticipates credit quality to stay at current levels, with gross charge-offs roughly equal to 1995. The 1996 effective tax rate is estimated at 35.5%, up from an adjusted 34.5% in 1995. Management says it is optimistic about long-term prospects, though the filing notes that future results depend on factors including cross-border investing, market values, interest rates, and competition.

04—Continue

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