01—Abstract
Summary
Summary of the 10-K filed March 26, 1998. Cited figures are marked; the original filing is the authoritative source.
State Street Corporation (STT) reported a strong 1997 in its 10-K filed March 26, 1998.
Net income rose 30% to $380 milliona, and diluted EPS reached $2.32, up from $1.78 in 1996. Total revenue grew 24% to $2.3 billion, driven by fee revenue of $1.67 billion (up 28%), with fiduciary compensation of $1.25 billion (up 23%) and foreign exchange trading revenue nearly doubling to $245 million. Return on equity was 20.6%, above the company's 18% goal.
Management called 1997 the company's twentieth consecutive year of double-digit EPS growth, but cautioned that favorable external factors such as strong equity markets and mutual fund inflows may not persist, so future EPS growth may revert toward its long-term historical pace. The franchise is a leading custodian and servicer for institutional investors. Assets under custody reached $3.9 trillionb (up 33%) and assets under management reached $390 billion (up 34%).
State Street is the largest U.S. mutual fund custodian and the largest servicer of U.S. tax-exempt pension assets, with a 24%c market share. Roughly half of the 1997 growth in custody assets came from higher securities values and half from new business and contributions. Revenue is roughly 71% fee-based, which supports recurring earnings, though it leaves results sensitive to equity market levels, cross-border investing, and currency volatility.
Balance sheet and capital metrics were solid. Total assets were $38.0 billiond, the Tier 1 risk-based capital ratio was 13.7%, and the leverage ratio was 5.9%, both well above regulatory minimums. Credit quality was strong, with net charge-offs of only $6 million (0.11% of average loans) and non-performing assets of $6 million.
Interest-rate sensitivity is modest: a 100 basis point rate increase would reduce expected 12-month net interest revenue by about $32 million. Key risks disclosed include Year 2000 remediation (budgeted at under $200 million over 1996-2000), pricing pressure, and the pending acquisition of Bank of Scotland's unit trust trustee business, expected in early 1998.
02—Key points
Key Highlights
- Net income of $380 million, up 30% from $293 million in 1996; diluted EPS of $2.32 versus $1.78 (up 30%)
- Total revenue of $2.3 billion, up 24%; fee revenue of $1.67 billion accounted for 71% of total revenue
- Return on stockholders' equity of 20.6%, above the 18% company goal and up from 18.1% in 1996
- Assets under custody of $3.9 trillion (up 33%) and assets under management of $390 billion (up 34%); largest U.S. mutual fund custodian with $1.7 trillion in mutual fund assets
- Foreign exchange trading revenue nearly doubled to $245 million, driven by higher volumes and about 50% greater currency volatility
- Strong capital and credit position: Tier 1 risk-based capital ratio of 13.7%, leverage ratio of 5.9%, and net charge-offs of only 0.11% of average loans
- Management cautions that 1997's favorable external factors may not recur, so future EPS growth may be closer to long-term historical rates
03—Questions
Frequently Asked Questions
What drove State Street's strong 1997 earnings growth?
Growth came mainly from fee revenue, which rose 28% to $1.67 billion. Fiduciary compensation was up 23% on higher asset levels and new business, foreign exchange trading revenue nearly doubled, and servicing and processing fees rose 28%. Management also credited favorable markets: U.S. equities rose 31%, U.S. mutual funds had strong inflows, and currency markets were volatile. Operating expenses rose 24% to $1.73 billion to support this growth.
How sensitive is State Street's revenue to market conditions?
Revenue is meaningfully tied to asset values. Management estimates that a 10% change in global equity values would move total revenue by about 2%, and a 10% change in bond values by less than 1%. Roughly half of the 1997 increase in assets under custody came from higher market values. Net interest revenue is affected by interest rates: a 100 basis point rise would reduce expected 12-month net interest revenue by about $32 million, while a 100 basis point decline would increase it by about $14 million.
Is State Street's balance sheet and capital position sound?
Yes. At year-end 1997 total assets were $38.0 billion. The Tier 1 risk-based capital ratio was 13.7% and the total capital ratio was 13.8%, versus regulatory minimums of 4% and 8%. The leverage ratio was 5.9%, against a 3% minimum. State Street Bank was categorized as well capitalized. Liquid assets were 77% of total assets, and the senior debt ratings were AA-, A1 and AA.
What are the main risks investors should consider?
The filing highlights several risks: cross-border investing, the savings rate of individuals, and the value of worldwide markets all affect fees, which depend partly on asset values. Interest-rate movements, currency volatility, and pricing pressure from competitors could affect results. Year 2000 remediation is a further risk, with costs estimated below $200 million over 1996-2000 and dependence on third-party providers. Acquisitions, such as the pending Bank of Scotland unit trust business, carry integration risk. Management also says 1997's strong external environment may not continue.
How much of the company's business is dependent on mutual funds and pensions?
The business is concentrated in institutional clients. Services for institutional investors produced 64% of operating profit and 72% of revenue in 1997. Mutual fund assets under custody were $1.7 trillion, and State Street had 254 mutual fund complexes as customers. Pension, insurance and other pool assets were $1.9 trillion. Its share of U.S. tax-exempt pension assets rose from 15% in 1993 to 24% in 1997, indicating both market-driven growth and share gains.
04—Continue