01—Abstract
Summary
Summary of the 10-K filed February 21, 2006. Cited figures are marked; the original filing is the authoritative source.
State Street Corporation (STT) reported a strong 2005 in its 10-K filed February 21, 2006, with net income of $838 milliona (diluted EPS $2.50) and income from continuing operations of $945 million (diluted EPS $2.82), up 18% and 20% respectively from 2004.
Total revenue grew 11% to $5.47 billionb while operating expenses rose 8%, producing positive operating leverage. The company met all three of its previously announced financial goals on an operating basis, with operating EPS growth of 14%, operating revenue growth of 10%, and a 15.3% return on shareholders' equity from continuing operations. Assets under custody reached a record $10.12 trillion and assets under management reached $1.44 trillion, both driving the fee growth that accounted for most of the revenue increase.
The quality of earnings is supported by fee revenue, which rose 12% to $4.55 billionc and represented roughly 83% of total revenue. Net interest revenue grew only 6% to $907 million, and the company disclosed a $107 million after-tax loss from discontinued operations tied to the planned divestiture of its Bel Air Investment Advisors stake. Investors should note that the company is sensitive to market levels: a 10% move in global equity values is estimated to change total revenue by about 2%.
Interest-rate exposure is also meaningful, since a 100 basis point rise is estimated to reduce net interest revenue by $58 milliond over twelve months. Unrealized losses on available-for-sale securities of $475 million pre-tax were recorded, reflecting the rise in rates during 2005, and the company's Tier 1 risk-based capital ratio declined to 11.7% from 13.3%. The filing also discloses ongoing regulatory and tax matters.
State Street is responding to industry-wide inquiries from regulators related to mutual fund market timing and late trading, and it is contesting IRS challenges to leveraged lease (LILO) and sale-in-lease-out (SILO) tax positions. Management believes these matters can be resolved without material adverse effect, but the company accrued for exposure and flagged that the FASB's proposed guidance on leveraged leases could produce a material cumulative charge. For 2006, management targets revenue growth of 8% to 12%, EPS growth of 10% to 15%, and ROE of 14% to 17%, with results expected near the middle of these ranges.
02—Key points
Key Highlights
- Net income of $838 million (diluted EPS $2.50) in 2005, including a $107 million after-tax loss from discontinued operations; income from continuing operations rose 18% to $945 million (diluted EPS $2.82, up 20%).
- Total revenue grew 11% to $5.47 billion versus operating expense growth of 8%, delivering positive operating leverage; total fee revenue rose 12% to $4.55 billion.
- Assets under custody reached a record $10.12 trillion (up from $9.50 trillion) and assets under management reached $1.44 trillion (up $87 billion), with management fees up 21%.
- Achieved all three 2005 financial goals on an operating basis: 14% operating EPS growth, 10% operating revenue growth, and 15.3% return on shareholders' equity from continuing operations.
- Net interest revenue increased 6% to $907 million, but rising rates pressured the balance sheet, with $475 million of pre-tax unrealized losses on available-for-sale securities and Tier 1 risk-based capital falling to 11.7% from 13.3%.
- Revenue is sensitive to market levels: a 10% change in worldwide equity values is estimated to move total revenue about 2%, and a 100 basis point rate increase is estimated to reduce net interest revenue by $58 million.
- Ongoing regulatory and tax exposures include industry-wide mutual fund market timing inquiries, IRS challenges to LILO and SILO transactions, and a proposed FASB leveraged lease standard that could trigger a material cumulative charge.
03—Questions
Frequently Asked Questions
How did State Street perform financially in 2005?
State Street reported net income of $838 million, or $2.50 per diluted share, including a $107 million after-tax loss from discontinued operations. Excluding that loss, income from continuing operations was $945 million, or $2.82 per diluted share, up 20% from $2.35 in 2004. Total revenue rose 11% to $5.47 billion, and the company achieved all of its stated 2005 financial goals on an operating basis.
What drove the growth in revenue?
Fee revenue grew 12% to $4.55 billion, led by servicing fees (up 9% to $2.47 billion) and management fees (up 21% to $751 million). The increases came from new business with existing and new customers and from higher equity market valuations. Trading services rose 17%, and securities finance rose 27%, while net interest revenue grew 6% to $907 million.
What risks should investors be aware of?
Revenue is tied to asset values, so a decline in global equity markets would reduce fees; a 10% drop is estimated to cut total revenue by about 2%. Rising interest rates shorten the benefit to net interest revenue, with a 100 basis point increase estimated to lower it by $58 million over twelve months. The company also faces regulatory scrutiny of the mutual fund industry, IRS challenges to leasing transactions, and possible accounting changes that could produce a material charge.
What is State Street's outlook for 2006?
Management set 2006 goals of 8% to 12% revenue growth, 10% to 15% operating EPS growth, and a 14% to 17% return on shareholders' equity. The company said it is targeting the middle of these ranges and cited a strong business pipeline and continued focus on international growth, with a long-term goal of deriving 50% of revenue from outside the U.S., up from 39% in 2005.
How strong is State Street's capital and liquidity position?
Both State Street and its principal bank exceeded regulatory minimums and 'well capitalized' thresholds at year-end 2005. However, the Tier 1 risk-based ratio fell to 11.7% from 13.3% as risk-weighted assets grew faster than capital. Liquid assets totaled $48.92 billion, and the company maintains high investment-grade credit ratings, with senior debt rated AA- by Standard & Poor's and Aa3 by Moody's.
04—Continue