October 23, 2017 / 8:39 PM / in 10 months

Fitch: Higher Interest Rates Boost State Street's 3Q17 Earnings

(The following statement was released by the rating agency) CHICAGO, October 23 (Fitch) State Street Corporation's third-quarter 2017 (3Q17) net income of $685 million was 22% higher year-over-year due to growth in net interest income (NII) and strong fee growth as well as some restructuring charges incurred in the prior year period. Fitch Ratings notes that NII benefited from higher short-term interest rates, and fee growth was driven by higher equity markets on a yoy basis. This quarter's results equated to a 13.0% annualized return on average equity (ROAE), which is a 240bp improvement relative to the prior year period. This is State Street's strongest quarterly ROAE in the last several quarters, and Fitch believes there is further upside to the company's overall returns should short-term rates continue to rise. NII increased 12% yoy to $603 million and the company's net interest margin (NIM) expanded to 1.35% in 3Q17, up a strong 21bps from the prior year period. The overall yield on average earning assets was up 33bps yoy while the overall cost on average liabilities lagged and was only up 15bps over the same period. The NIM also benefited from a 21.0% yoy reduction in lower-yielding cash balances, as some clients moved cash into the markets. Overall fee revenue grew 7.8% yoy due to the acquisition of General Electric's Asset Management (GEAM) business which closed in July 2016, market appreciation of assets under custody and administration (AUCA), as well as assets under management (AUM). State Street's total AUCA amounted to $32.1 trillion at 3Q17, up 10.0% yoy primarily due to growth in Equities AUCA in North America, which benefited from a 14.1% increase in the S&P 500 market index. Overall AUM increased to a record $2.7 trillion, up 9.3% yoy. The company's AUM growth was driven by previously noted market appreciation and the GEAM business, partially offset by $25 billion of outflows experienced during the quarter. State Street's market-based revenue growth was mixed with foreign exchange (FX) trading declining 5.7% yoy, due in part to a strong year-ago quarter that benefited from higher trading activity around BREXIT. Securities finance revenue increased 8.1% yoy due to a mix of higher volumes and higher interest rates. Overall expenses grew only 1.9% yoy as higher compensation expenses were in part offset by lower restructuring costs and lower compliance-related expenses incurred in relation to the company's resolution planning initiatives. As a result, State Street generated strong operating leverage of 670bps at 3Q17 and the pre-tax operating margin expanded to a strong 28.9%, up from 24.3% in the prior year's quarter. The Beacon program remains a key strategy for management to drive efficiencies across the company's operating platform through continued automation of core business activities, improved client interfaces, and rationalization the company's operations and applications. Fitch notes that Beacon remains on track to achieve annual pre-tax run-rate expense savings of $550 million by the end of 2020. Beacon has already delivered $175 million of pre-tax run-rate expense savings in 2016 and remains on target to achieve at least $140 million in additional pre-tax expense savings in 2017. State Street's total balance sheet declined 7.9% yoy to $235.9 billion driven primarily by a 9.8% reduction in total deposits as clients moved cash into the markets and management continues to work to optimize State Street's deposit base. Despite the deposit outflows, State Street's balance sheet remains very liquid with approximately 91% of its $92.8 billion investment portfolio rated 'AAA'/'AA' and a portfolio duration of 2.3 years. State Street's estimated fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the standardized approach was solid at 11.3% at 3Q17. More significant than the CET1 ratios noted above, however, is the Enhanced Supplementary Leverage Ratio (ELSR). As of 3Q17, State Street fully phased-in ESLR at the parent company increased to 6.4% amid the previously noted deposit outflow; at the main bank subsidiary this figure was 6.8%. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Christopher Van Bell Associate Director +1-212-908-0777 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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