01—Abstract
Summary
Summary of the 10-K filed March 23, 1999. Cited figures are marked; the original filing is the authoritative source.
State Street Corporation (NYSE: STT) reported a strong 1998 in its 10-K filed March 23, 1999.
Diluted EPS rose 15% to $2.66a and net income grew 15% to $436 million. Total revenue increased 18% to $2.8 billion, driven by fiduciary compensation (up 20% to $1.5 billion), foreign exchange trading (up 18%), and net interest revenue (up 15% to $785 million on a taxable-equivalent basis). Return on equity was 20.2%, above the company's 18% goal, and management marked the year as its 21st consecutive year of double-digit EPS growth.
The business is a bank holding company focused on institutional investors. It is the largest U.S. mutual fund custodian and accounting agent, with $4.8 trillionb in assets under custody and $485 billion under management at year-end 1998. Services for Institutional Investors generated 67% of pre-tax income, Investment Management 14%, and Commercial Lending 19%.
Growth was strong across custody, asset management and non-U.S. operations, with non-U.S. assets under custody up 36% to $362 billionc. Risks flagged in the filing include a 1.90% net interest margin, down from 2.18%, as balance-sheet growth shifted into low-yielding money market assets and the yield curve flattened.
Operating expenses rose 19% to $2.1 billiond, and the filing notes Year 2000 readiness costs (cumulative $72 million) and potential effects on new business in the second half of 1999. Capital remained strong, with a Tier 1 risk-based ratio of 14.1% and a leverage ratio of 5.4%.
02—Key points
Key Highlights
- Diluted EPS of $2.66, up 15%; net income of $436 million, up 15%; 21st consecutive year of double-digit EPS growth
- Total revenue of $2.8 billion, up 18%; fee revenue of $2.0 billion (72% of total), up 19%
- Return on stockholders' equity of 20.2%, exceeding the company's 18% goal
- Assets under custody of $4.8 trillion (up 23%) and assets under management of $485 billion (up 24%) at year-end 1998
- Largest U.S. mutual fund custodian and accounting agent; non-U.S. assets under custody grew 36% to $362 billion
- Net interest margin compressed to 1.90% from 2.18% as the yield curve flattened and balance-sheet growth shifted to money market assets
- Strong capital position: Tier 1 risk-based ratio of 14.1%, total capital ratio of 14.4%, leverage ratio of 5.4%; dividends rose to $0.52 per share from $0.44
03—Questions
Frequently Asked Questions
What drove State Street's revenue growth in 1998?
Growth came mainly from fiduciary compensation, which rose 20% to $1.5 billion on higher assets under custody and management and new business. Foreign exchange trading revenue rose 18% to $289 million, and net interest revenue rose 15% to $785 million as customer deposits and repurchase agreements grew. About 80% of revenue growth came from existing customers.
Is the decline in net interest margin a concern for investors?
The margin fell to 1.90% from 2.18%, mainly because of balance-sheet growth in short-term money market instruments and a flatter U.S. yield curve. Management notes that in the short term, falling rates benefit net interest revenue and rising rates hurt it, though net interest revenue still grew 15% in dollar terms. Investors should track whether margin pressure persists.
What are the main risks to State Street's business outlook?
Key risks include sensitivity of fee revenue to global equity and bond valuations (a 10% equity move would change total revenue by roughly 2%), interest-rate and currency volatility, pricing pressure from competitors, and potential customer hesitancy about new business in the second half of 1999 due to Year 2000 uncertainty. Year 2000 remediation costs are estimated at under 2% of operating expenses for 1996-2000.
How strong is State Street's capital and liquidity position?
Capital is strong, with a Tier 1 risk-based capital ratio of 14.1%, a total capital ratio of 14.4%, and a leverage ratio of 5.4%, all above regulatory requirements. Liquid assets were 80% of total assets at year-end 1998, placing the company among the highest 10% of U.S. bank holding companies. Senior debt is rated AA- by S&P, A1 by Moody's and AA by Fitch IBCA.
How is State Street's business divided across its lines?
Services for Institutional Investors generated 67% of 1998 pre-tax income and 71% of total revenue, with pre-tax income of $470 million. Investment Management contributed 14% of pre-tax income and 20% of revenue, with revenue up 26% to $558 million. Commercial Lending provided 19% of pre-tax income, with a pre-tax margin of 56%.
04—Continue