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Fitch: Higher Markets Help Boost State Street's 1Q17 Earnings
April 28, 2017 / 8:41 PM / in 8 months

Fitch: Higher Markets Help Boost State Street's 1Q17 Earnings

(The following statement was released by the rating agency) CHICAGO, April 28 (Fitch) State Street Corporation's (STT) first quarter 2017 (1Q17) net income was $502 million down 15.3% from the sequential quarter which included a $248 million tax benefit, but up 36.4% from the year-ago quarter, according to Fitch Ratings. The year-over-year increase was due to higher management fees as a result of the July 2016 closing of the acquisition of GE's Asset Management (GEAM) business as well as market appreciation of assets under custody and administration (AUCA) and assets under management (AUM). The company's overall return on average equity (ROAE) was 9.9% in 1Q17 down from 12.1% in the sequential quarter but up from 6.8% in the year-ago quarter. Given the potential for higher short-term interest rates over the course of the year, Fitch believes STT's ROAE could continue to increase over the subsequent quarters. STT's total revenue was up 5.5% relative to the sequential quarter and 7.4% relative to the year-ago quarter. The biggest driver of the revenue increase was higher management fees in State Street Global Advisors (SSGA). Relative to the year-ago quarter this was due to the impact of the GEAM acquisition noted above. Relative to the sequential quarter this was due to market appreciation driving higher AUM. The company's total AUCA amounted to $29.8 trillion in 1Q17, up 4% from the sequential quarter and 11% from the year-ago quarter. Both the year-over-year and sequential growth is due to a mix of market appreciation and positive exchange-traded fund (ETF) servicing flows. STT's AUM grew 4% from the sequential quarter and 12% from the year-ago quarter. This was due to a mix of market appreciation, some growth from the acquired GEAM business and positive ETF flows. STT's market based revenue was more mixed with total trading services revenue (including foreign exchange (FX) trading) down 6% sequentially but up 1% year-over-year. Trading revenue continues to be highly dependent on FX volatility, which was more muted during the quarter. Additionally, securities finance revenue was down 2% sequentially and 1% year-over-year. Net interest income (NII) was down 1% sequentially and flat relative to the prior year period, as an incrementally smaller balance sheet due to deposit outflows was offset by a higher net interest margin (NIM). STT's NIM was 1.17% in 1Q17, up from 1.09% sequentially and 1.15% in the year-ago quarter. Given the expectation for higher short-term interest rates over the course of the year, Fitch would expect STT's NIM to continue to expand. Overall expenses were down 4% sequentially, and up 2% year-over-year, such that STT generated positive operating leverage relative to both periods. This was primarily due to lower acquisition and restructuring costs as well as continued benefits from STT's Beacon expense management initiatives. As a result, STT's pre-tax margin expanded to 21.9% in 1Q17, up from 13.6% in the sequential quarter and 17.3% in the year-ago quarter. As of 1Q17, STT's total balance sheet was $236.8 billion down 2.4% from the sequential quarter and 2.8% from the year-ago quarter. This was in part driven by deposit outflows during the quarter as STT continues to manage excess deposits away from its balance sheet. As of 1Q17, total deposits represented $183.5 billion down 2.0% from the sequential quarter and 1.1% from the year ago quarter. Nevertheless, STT's balance sheet remains very liquid with approximately 92% of its $94 billion investment portfolio rated 'AAA'/'AA' and a duration of 2.3 years. Fitch would note that management rebalanced a portion of its securities portfolio this year to incrementally better position the portfolio for higher short-term interest rates. As such, STT realized $40 million in realized securities losses associated with the sale of $2.7 billion in agency mortgage backed securities (MBS) and U.S. Treasuries. STT's estimated fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the advanced approaches was 10.9% at 1Q17, unchanged from year-end 2016. This was due to a mix of higher retained earnings offset by share buybacks, dividends, and an incrementally higher risk-weighted assets (RWA) driven by a larger component of operational risk related RWA. More binding than the CET1 ratios noted above, however, is the Enhanced Supplementary Leverage Ratio (ELSR). As of 1Q17, STT's fully phased-in ESLR at the parent company was 6.0%, 100 basis points (bps) above the requirement, and at the main bank subsidiary was 6.5%, 505 bps above the requirement. The ESLR ratios at the parent and the main bank both improved 40 bps due to the lower deposit balances noted above. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Chris Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@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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