10-QPeriod: Q2 FY2008

STATE STREET CORP Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 1, 2008For Securities:STTSTT-PG

Summary

State Street Corporation (STT) reported robust financial performance for the second quarter and first six months of 2008, demonstrating significant growth in total revenue and net income compared to the prior year. Total revenue increased by 39% in the quarter and 45% year-to-date, largely driven by a substantial rise in fee revenue, which grew 31% and 36% respectively. This growth was fueled by strong performance across key segments, including servicing fees, trading services, and particularly securities finance, which saw exceptional increases. Net interest revenue also experienced substantial growth, up 71% for the quarter and 81% year-to-date, benefiting from wider spreads and increased customer deposits. Despite a 36% increase in operating expenses primarily due to integration costs from the Investors Financial acquisition and increased staffing, the company achieved positive operating leverage. Diluted earnings per share saw a significant increase, reflecting the strong top-line growth and improved profitability. The company also highlighted substantial new business generated in assets to be serviced, positioning it well for future fee revenue generation.

Financial Highlights

22 data points
Beta

Revenue

$2.67B

Net Income

$548.00M

20.5% Net Margin

EPS (Diluted)

$1.35

Free Cash Flow

-$894.00M

Financial Statements
Beta
Revenue$2.67B
Interest Expense$480.00M
Net Income$548.00M
EPS (Basic)$1.36
EPS (Diluted)$1.35
Shares Outstanding (Basic)402.48M
Shares Outstanding (Diluted)406.96M

Key Highlights

  • 1Total revenue surged 39% year-over-year in Q2 2008 to $2.67 billion, with year-to-date revenue up 45% to $5.25 billion.
  • 2Net income grew by 50% to $548 million in Q2 2008, and by 59% to $1.08 billion year-to-date.
  • 3Fee revenue increased significantly, up 31% in Q2 2008 and 36% year-to-date, driven by strong growth in servicing fees, trading services, and particularly securities finance revenue (up 117% and 152% respectively).
  • 4Net interest revenue more than doubled, increasing by 71% in Q2 2008 and 81% year-to-date, reflecting wider interest rate spreads and increased customer deposits.
  • 5Diluted earnings per share increased to $1.35 in Q2 2008, up 26% year-over-year, and to $2.70 year-to-date, up 35%.
  • 6Assets under custody reached $15.26 trillion, an increase of 17% year-over-year, while assets under management stood at $1.89 trillion.
  • 7The company generated approximately $400 billion of new business in assets to be serviced during Q2 2008, indicating strong future revenue potential.

Frequently Asked Questions

State Street's revenue growth was primarily driven by a significant increase in fee revenue, up 31% year-over-year, and a substantial rise in net interest revenue, up 71%. Key contributors to fee revenue growth included strong performance in servicing fees, trading services, and particularly securities finance, which saw a 117% increase. The growth in net interest revenue was attributed to wider interest rate spreads and an increase in customer deposits.

The acquisition of Investors Financial, completed in July 2007, significantly contributed to revenue growth in both fee revenue and net interest revenue. However, it also led to an increase in operating expenses, including $32 million in merger and integration costs for the second quarter of 2008. The acquired business also added approximately $1.9 trillion in assets under custody.

Securities finance revenue experienced exceptional growth in the second quarter of 2008, increasing by 117% year-over-year. This was primarily driven by wider credit spreads. However, the company expects this growth to moderate in the second half of 2008 as the benefit from wider spreads is anticipated to decrease.

State Street is experiencing significant unrealized losses on its investment securities portfolio, totaling $3.31 billion pre-tax ($2.01 billion after-tax) as of June 30, 2008, largely due to market illiquidity in fixed-income securities. The company has performed extensive reviews and concluded that these declines are temporary and they have the ability and intent to hold these securities until market recovery. They are also actively managing their investment portfolio within approved risk limits.