10-QPeriod: Q1 FY2005

STATE STREET CORP Quarterly Report for Q1 Ended Mar 31, 2005

Filed May 6, 2005For Securities:STTSTT-PG

Summary

State Street Corporation's (STT) first quarter 2005 results show solid revenue growth driven by strong performance in both its Investment Servicing and Investment Management segments. Total revenue increased by 7% year-over-year to $1.31 billion, with fee revenue showing a robust 8% increase, bolstered by higher servicing and management fees. Net income rose by 4% to $226 million, translating to diluted earnings per share of $0.67, a 6% increase from the prior year's quarter when adjusted for merger costs. The company's balance sheet remains strong, with total assets growing to $100.1 billion. While deposits increased, the company also saw an increase in short-term borrowings. Management highlighted the company's continued focus on operational efficiency and managing interest rate risk in a rising rate environment, indicating proactive portfolio adjustments. Despite some headwinds from rising interest rates impacting net interest revenue, State Street's diversified business model and robust fee-based income streams provide a stable foundation.

Key Highlights

  • 1Total revenue increased by 7% to $1.31 billion, driven by strong fee revenue growth.
  • 2Net income grew by 4% to $226 million, with diluted EPS rising 6% to $0.67.
  • 3Investment Servicing fee revenue increased 8% to $883 million, supported by higher servicing fees.
  • 4Investment Management fees grew 20% to $177 million, reflecting new business and market appreciation.
  • 5Total assets grew to $100.1 billion, with a significant portion remaining in liquid assets.
  • 6The company maintained strong regulatory capital ratios, well above minimum requirements.
  • 7State Street is actively managing its exposure to rising interest rates through portfolio adjustments.

Frequently Asked Questions

Revenue growth was primarily driven by an 8% increase in fee revenue, which reached $1.10 billion. This was largely due to higher servicing fees (up 8%) from new business and improved market valuations, and a 20% increase in management fees (up 20%) driven by new business wins and market appreciation. Net interest revenue also contributed positively, growing 4%.

Total operating expenses increased by 6% to $966 million. The primary drivers for this increase were higher salaries and employee benefits (up 13%) due to new hires for business wins and merit adjustments, and increased transaction processing costs (up 13%) due to higher volumes. These increases were partially offset by the absence of merger and integration costs ($18 million in Q1 2004) and a decrease in information systems and communications expenses.

Management noted that the company is positioned for a rising interest rate environment. While net interest revenue saw a modest increase, they acknowledged that rising rates have a constraining effect in the short term due to the repricing characteristics of assets and liabilities. State Street has adjusted its investment securities portfolio to include a higher percentage of mortgage-backed and floating-rate securities to better navigate this environment.

The company is responding to various regulatory inquiries, including those from the SEC and Department of Labor, related to the securities industry and mutual fund matters. Additionally, there are ongoing tax matters, including proposed disallowances related to lease-in-lease-out (LILO) transactions and potential reviews of sale-in-lease-out (SILO) transactions, which are being contested with tax authorities. State Street believes it is appropriately accrued for potential exposures related to these tax matters.