10-QPeriod: Q3 FY2009

STATE STREET CORP Quarterly Report for Q3 Ended Sep 30, 2009

Filed November 6, 2009For Securities:STTSTT-PG

Summary

State Street Corporation (STT) reported its third quarter 2009 results, reflecting a challenging economic environment and specific legal and operational issues. While total revenue declined year-over-year, driven by lower fee revenue due to market conditions, net interest revenue saw a significant increase. This boost in net interest revenue was primarily attributed to discount accretion from the consolidation of asset-backed commercial paper conduits, partially offset by lower deposit volumes and spreads. The company's expenses were reduced due to workforce reductions and lower incentive compensation accruals, but were impacted by a substantial provision for legal exposure related to active fixed-income strategies. Despite a decline in earnings per share compared to the prior year, State Street maintained strong regulatory capital ratios, exceeding minimum requirements. The company's assets under custody and administration, as well as assets under management, showed growth from the end of 2008, indicating continued client activity. However, the report highlights ongoing legal proceedings, including an SEC investigation and a class-action lawsuit, which have led to increased reserves and could pose future risks.

Financial Highlights

34 data points
Beta

Revenue

$2.24B

Net Income

$327.00M

14.6% Net Margin

EPS (Diluted)

$0.66

Total Assets

$163.28B

Free Cash Flow

$211.00M

Financial Statements
Beta
Revenue$2.24B
Interest Expense$175.00M
Net Income$327.00M
EPS (Basic)$0.66
EPS (Diluted)$0.66
Shares Outstanding (Basic)493.45M
Shares Outstanding (Diluted)498.29M

Key Highlights

  • 1Net income for Q3 2009 was $327 million, or $0.66 per diluted share, down from $477 million, or $1.09 per diluted share, in Q3 2008.
  • 2Total revenue decreased by 19% year-over-year to $2.24 billion, primarily due to a 23% drop in total fee revenue, reflecting the impact of global financial market declines.
  • 3Net interest revenue increased by 38% to $723 million, largely driven by discount accretion from the consolidation of asset-backed commercial paper conduits.
  • 4Total expenses decreased by 10% to $1.73 billion, primarily due to a 20% reduction in salaries and benefits expense from workforce reductions and lower incentive compensation.
  • 5A significant provision of $250 million was recorded for legal exposure related to active fixed-income strategies, impacting reported earnings.
  • 6Assets under custody and administration grew to $17.94 trillion as of September 30, 2009, up from $15.91 trillion at the end of 2008.
  • 7Assets under management increased to $1.74 trillion as of September 30, 2009, up from $1.44 trillion at the end of 2008.

Frequently Asked Questions

The substantial increase in net interest revenue was primarily driven by discount accretion totaling $279 million in the third quarter of 2009, resulting from the consolidation of asset-backed commercial paper conduits onto the company's balance sheet in May 2009. This accretion is expected to continue contributing to net interest revenue in future periods.

The $250 million provision for legal exposure was added to the existing reserve to account for a potential settlement with the SEC and other regulatory authorities concerning active fixed-income strategies managed by SSgA. This provision had a direct impact on the company's net income and earnings per share for the quarter.

The decline in global financial markets significantly impacted State Street's fee revenue. Servicing fees and management fees, which are influenced by the valuation of assets under custody and management, decreased by 14% and 16% respectively in the third quarter of 2009 compared to the prior year. Trading services and securities finance revenues also saw declines due to reduced market volatility and lower trading volumes.

State Street maintained strong regulatory capital ratios, with its Tier 1 risk-based capital ratio at 15.3% and total risk-based capital ratio at 16.5% as of September 30, 2009. All key capital ratios exceeded the applicable regulatory minimums and 'well-capitalized' thresholds, indicating a robust capital position despite the challenging economic environment.