What drove State Street's earnings growth in 1996?

Earnings growth came mainly from fee revenue, especially fiduciary compensation from mutual fund, master trust, and global custody services, which rose 24% to $1.02 billion. Net interest revenue also rose 27%, helped by growth in customer deposits and a wider spread between earning-asset yields and funding costs. Operating expenses grew 19%, partly reflecting investment in staff and technology to support new business.

How dependent is State Street's revenue on financial market levels?

Management estimates that a 10% change in equity values would change total revenue by about 1%, and a 10% change in bond values would change it by less than 1%. Revenue is also affected by interest rates: because interest-bearing liabilities reprice faster than assets, falling short-term rates tend to help net interest revenue, while rising rates tend to hurt it. Foreign exchange trading revenue, by contrast, fell 11% in 1996 because lower market volatility reduced trading profits.

What is the quality and risk profile of State State's balance sheet?

The balance sheet is conservative and highly liquid. Investment securities and money-market assets make up about 73% of total assets, loans are only about 15%, and liquid assets were 78% of total assets at year-end 1996. Most loans are commercial lending and lease financing, and the company reports strong credit quality with minimal non-performing assets. Credit risk is mainly tied to customers' securities lending and settlement activity rather than to a large loan book.

What do the 1996 capital actions and the stock split mean for shareholders?

In December 1996 State Street issued $200 million of 7.94% capital securities due 2026, and in June 1996 it issued $150 million of 7.35% notes, which lowered its long-term cost of capital. It repurchased 2.7 million shares during 1996 for about $48 per share. The board also approved a two-for-one stock split in the form of a 100% stock dividend, subject to shareholder approval of an increase in authorized shares at the April 16, 1997 annual meeting. The split would double the number of shares outstanding without changing each holder's proportional ownership.

Where does State Street generate its business, and how fast is its international business growing?

The company's three lines of business were Financial Asset Services (64% of 1996 operating profit), Commercial Lending (21%), and Investment Management (15%). Non-U.S. customers accounted for 20% of total revenue in 1996, up from 14% in 1991, and assets under custody for non-U.S. customers grew 33% to $202 billion. Non-U.S. activities represented about 19% of total assets, and management plans to increase its focus on opportunities outside the United States in 1997.

STT/STT-PG 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1997. Cited figures are marked; the original filing is the authoritative source.

State Street Boston Corporation (STT) closed 1996 with a strong year across its three lines of business.

Fully diluted EPS rose 21% to $3.56^a, the company's nineteenth consecutive year of double-digit EPS growth. Total revenue grew 19% to $1.88 billion, net income rose about 19% to $293 million, and return on average equity reached 18.1%, which management said exceeded its 18% goal. Fee revenue grew 16% to $1.30 billion, led by fiduciary compensation (up 24%), while taxable-equivalent net interest revenue rose 27% to $588 million as the spread between earning-asset yields and funding costs widened to 1.53% from 1.21%.

Growth came from new business wins, cross-border investing, and the expansion of assets under custody to $2.9 trillion and assets under management to $292 billion^b. The balance sheet is large and liquidity-focused, with $31.5 billion in total assets, of which about 73% are investment securities and money-market assets and only 15% are loans. Credit quality was very strong: net recoveries were $2 million in 1996, non-performing assets fell to $13 million, and the allowance covered 1.54% of loans.

Capital ratios were solid, with a Tier 1 risk-based ratio of 13.4% and a total risk-based ratio of 13.6%. The company also issued $200 million^c of 7.94% capital securities and $150 million of 7.35% notes, repurchased 2.7 million shares, and announced a two-for-one stock split subject to shareholder approval in April 1997. For investors, the key points are the consistent double-digit earnings growth, the rising importance of custody and fund services relative to traditional lending, and the sensitivity of revenue to securities market values and interest rate spreads.

Management noted that a 10%^d change in equity values would move total revenue by about 1%, and that rising short-term rates would reduce net interest revenue in the near term. Other risks include foreign exchange trading revenue, which fell 11% in 1996 with lower market volatility, and the company's growing exposure to non-U.S. business.

02—Key points

Key Highlights

Fully diluted EPS rose 21% to $3.56, the 19th consecutive year of double-digit EPS growth; net income reached $293 million.
Total revenue grew 19% to $1.88 billion, with fee revenue up 16% to $1.30 billion and net interest revenue up 27% to $588 million (taxable-equivalent).
Return on average equity was 18.1%, above the company's 18% goal; return on average assets was 0.99%.
Assets under custody reached $2.9 trillion (up 29%), and assets under management reached $292 billion (up 29%), with $1.3 trillion in mutual fund custody and 39% of registered U.S. mutual funds serviced.
Net interest margin widened to 2.23% from 2.01%, as the rate spread increased to 1.53% from 1.21%.
Credit quality improved: net recoveries of $2 million in 1996, non-performing assets of $13 million, and an allowance equal to 1.54% of loans.
Capital remained strong, with a Tier 1 risk-based ratio of 13.4% and a total risk-based ratio of 13.6%; the company announced a two-for-one stock split for shareholder approval in April 1997.

03—Questions

Frequently Asked Questions

What drove State Street's earnings growth in 1996?
Earnings growth came mainly from fee revenue, especially fiduciary compensation from mutual fund, master trust, and global custody services, which rose 24% to $1.02 billion. Net interest revenue also rose 27%, helped by growth in customer deposits and a wider spread between earning-asset yields and funding costs. Operating expenses grew 19%, partly reflecting investment in staff and technology to support new business.
How dependent is State Street's revenue on financial market levels?
Management estimates that a 10% change in equity values would change total revenue by about 1%, and a 10% change in bond values would change it by less than 1%. Revenue is also affected by interest rates: because interest-bearing liabilities reprice faster than assets, falling short-term rates tend to help net interest revenue, while rising rates tend to hurt it. Foreign exchange trading revenue, by contrast, fell 11% in 1996 because lower market volatility reduced trading profits.
What is the quality and risk profile of State State's balance sheet?
The balance sheet is conservative and highly liquid. Investment securities and money-market assets make up about 73% of total assets, loans are only about 15%, and liquid assets were 78% of total assets at year-end 1996. Most loans are commercial lending and lease financing, and the company reports strong credit quality with minimal non-performing assets. Credit risk is mainly tied to customers' securities lending and settlement activity rather than to a large loan book.
What do the 1996 capital actions and the stock split mean for shareholders?
In December 1996 State Street issued $200 million of 7.94% capital securities due 2026, and in June 1996 it issued $150 million of 7.35% notes, which lowered its long-term cost of capital. It repurchased 2.7 million shares during 1996 for about $48 per share. The board also approved a two-for-one stock split in the form of a 100% stock dividend, subject to shareholder approval of an increase in authorized shares at the April 16, 1997 annual meeting. The split would double the number of shares outstanding without changing each holder's proportional ownership.
Where does State Street generate its business, and how fast is its international business growing?
The company's three lines of business were Financial Asset Services (64% of 1996 operating profit), Commercial Lending (21%), and Investment Management (15%). Non-U.S. customers accounted for 20% of total revenue in 1996, up from 14% in 1991, and assets under custody for non-U.S. customers grew 33% to $202 billion. Non-U.S. activities represented about 19% of total assets, and management plans to increase its focus on opportunities outside the United States in 1997.

04—Continue

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