State Street Reports Third-Quarter 2012 GAAP EPS of $1.36 on Revenue of $2.36 Billion

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State Street Reports Third-Quarter 2012 GAAP EPS of $1.36 on Revenue of $2.36 Billion

Reports EPS of $0.99 on an Operating Basis and Achieves Positive Operating Leverage

Completed Acquisition of Goldman Sachs' Hedge Fund Administration Business


Returns Capital to Shareholders in the Third Quarter by Purchasing $480 Million of Common Stock and Declaring a Dividend of $0.24 Per Common Share

BOSTON--(BUSINESS WIRE)-- State Street Corporation (NYS: STT) :

Third-Quarter 2012 GAAP Results

  • Earnings per common share (EPS) of $1.36, increased from $0.98 in the second quarter of 2012 and from $1.10 in the third quarter of 2011. The third quarter of 2012 includes a net after-tax benefit of $0.35 per share, the majority of which pertains to claims associated with the 2008 Lehman Brothers bankruptcy.
  • Net income available to common shareholders of $654 million increased from $480 million in the second quarter of 2012 and from $543 million in the third quarter of 2011.
  • Revenue of $2.36 billion decreased 3% from $2.42 billion and $2.43 billion in the second quarter of 2012 and third quarter of 2011, respectively.
  • Net interest revenue of $619 million decreased 8% from $672 million in the second quarter of 2012 and increased 7% from $578 million in the third quarter of 2011.
  • Expenses decreased 20%to $1.42 billion from $1.77 billion in the second quarter of 2012 and 21% from $1.80 billion in the third quarter of 2011.
  • Return on average common shareholders' equity (ROE) of 13.3% increased from 10.0% in the second quarter of 2012 and 11.2% in the third quarter of 2011.
  • GAAP results include a net pre-tax benefit of $277 million (net after-tax benefit of $166 million, or $0.35 per share) composed of:

    • a $362 million benefit related to claims associated with the 2008 Lehman Brothers bankruptcy; partially offset by
    • a $60 million provision for previously disclosed litigation arising out of our asset management and securities lending businesses; and
    • a special $25 million contribution to fund the Company's charitable grant-making activities.

Third-Quarter 2012 Operating-basis (Non-GAAP) Results(1)

  • EPS of $0.99 decreased 2% from $1.01 in the second quarter of 2012 and increased 3% from $0.96 in the third quarter of 2011.
  • Net income available to common shareholders of $473 million decreased 4% from $494 million in the second quarter of 2012 and 1% from $476 million in the third quarter of 2011.
  • Revenue of $2.35 billion declined 3% from $2.43 billion and $2.41 billion in the second quarter of 2012 and third quarter of 2011, respectively.
  • Net interest revenue on a fully taxable-equivalent basis, and excluding conduit-related discount accretion of $40 million, was $611 million, a decrease of 3% from $629 million in the second quarter of 2012, and an increase of 8% percent from $564 million in the third quarter of 2011. Average excess deposits of $16 billion for the third quarter of 2012 increased $1 billion from $15 billion for both the second quarter of 2012 and the third quarter of 2011.
  • Expenses of $1.66 billion decreased 4% from $1.73 billion in the second quarter of 2012 and 3% from $1.71 billion in the third quarter of 2011.
  • ROE of 9.6% decreased from 10.3% in the second quarter of 2012 and from 9.8% in the third quarter of 2011.

Third-Quarter 2012 Operating-basis (Non-GAAP) Highlights(1)

  • New Business: Awarded $211 billionin asset servicing mandates and $78 billion of net new assets to be managed by State Street Global Advisors (SSgA).
  • Operating Leverage: Achieved positive operating leverage of 50 basis points and 20 basis points compared to the second quarter of 2012 and the third quarter of 2011, respectively.
  • Business Operations and Information Technology Transformation program: On track to achieve incremental annual pre-tax operating-basis expense savings(1) in the range of $90 million to $100 million in 2012. The estimated cumulative expense savings through the end of 2012 are expected to be approximately $180 million(2).
  • Capital(3): Estimated pro forma tier 1 common ratiounder the recent U.S. Basel III Notices of Proposed Rulemaking (NPRs) was 11.3% as of September 30, 2012.
  • Dividend and share purchases: State Street declared a quarterly common stock dividend of $0.24 per share and purchased $480 million of its common stock at an average price of $42.11.
  • Goldman Sachs Administration Services (GSAS): Completed the acquisition on October 15, 2012, establishing State Street as the market leader in this fast-growing market in hedge fund administration(4).
   (1)Operating basis is a non-GAAP presentation. For an explanation of operating-basis information, refer to the addendum included with this news release.
(2)Estimated pre-tax, run-rate operating-basis expense savings relate only to the Business Operations and Information Technology Transformation program and are based on projected incremental improvement in 2012 from total 2010 operating-basis expenses of $6.18 billion; actual expenses of the Company may increase or decrease due to other factors.
(3)Unless otherwise specified, all capital ratios referenced in this news release refer to State Street Corporation and not State Street Bank and Trust Company. Refer to the addendum included with this news release for a further discussion of these ratios and for reconciliations applicable to the tier 1 common ratio. Also, see "Capital" below.
(4)Based on HFMWeek Assets under Administration Survey, May 31, 2012, which cited $505.5 billion and $200.6 billion of assets serviced for State Street and Goldman Sachs, respectively.

Chairman's Perspective

Joseph L. Hooley, State Street's chairman, president and chief executive officer, said, "Our third-quarter results reflect continued resilience across both asset servicing and asset management, partially offset by weakness in trading services. In a difficult environment, we were able to achieve positive operating leverage by controlling expenses and by continuing to implement our Business Operations and Information Technology Transformation program."

Hooley continued, "Although equity markets have improved, clients remain conservative in their investment allocations which adversely affects our revenue. We continue to see demand for our solutions as evidenced by $211 billion of new asset servicing wins, net new assets of $78 billion to be managed by State Street Global Advisors and a strong pipeline."

"We look forward to integrating the recently closed acquisition of the Goldman Sachs Administration Services business and introducing these clients to our broad range of products and services. While acquisitions are consistent with our long-term growth strategy, one of our highest priorities in the current environment is returning capital to our shareholders. During the third quarter, we purchased $480 million of common stock, leaving $840 million remaining under our $1.8 billion common stock authorization, which we plan to complete in March of 2013."

"We remain confident in the long-term growth prospects of our business and continue to execute against our priorities of leveraging the power of our core franchise, managing our expenses carefully, delivering value to our clients through innovation and returning capital to our shareholders," Hooley concluded.

Non-GAAP Financial Measures

In addition to presenting State Street's financial results in conformity with U.S. generally accepted accounting principles (GAAP), management also presents results on a non-GAAP, or "operating" basis, in order to highlight comparable financial trends and other characteristics with respect to State Street's business operations from period to period. Descriptions of our non-GAAP, or operating-basis financial measures, together with reconciliations of operating-basis information to GAAP-basis information, are provided in the addendum included with this news release.

The table below provides a summary of selected financial information and key ratios for the indicated periods, presented on an operating (non-GAAP) basis where noted. Amounts are presented in millions of dollars, except for per-share amounts or where otherwise noted.

Financial Highlights(1)
(Dollars in millions) Q3 2012 Q2 2012 

% Increase
(Decrease)

 Q3 2011 

% Increase
(Decrease)

Total revenue(1)$2,348$2,426(3.2)%$2,413(2.7)%
Total expenses(1)$1,664$1,728(3.7)%$1,713(2.9)%
Net income available to common shareholders(1)$473$494(4.3)%$476(0.6)%
Earnings per common share(1)$0.99$1.01(2.0)%$0.963.1%
Return on average common equity(1)9.6%10.3%(70) bps9.8%(20) bps
 
Total assets at period end$204,522$200,7771.9%$208,795(2.0)%
Quarterly average total assets$195,805$189,0953.5%$180,9948.2%
Net interest margin1.44%1.54%(10) bps1.44%0 bps

Net unrealized gain (loss) on investment portfolio, after-tax
at period end

$577$(54)$(259)
   

(1)

Presented on an operating basis, a non-GAAP presentation. Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
 
Assets Under Custody and Administration and Assets Under Management
(Dollars in billions) Q3 2012 Q2 2012 

% Increase
(Decrease)

 Q3 2011 

% Increase
(Decrease)

Assets under custody and administration(1) (2)$23,441$22,4234.5%$21,5109.0%
Assets under management(2)$2,065$1,9088.2%$1,85511.3%
 
Market Indices
S&P 500® daily average1,4011,3503.8%1,22514.4%
MSCI EAFE® daily average1,4681,4272.9%1,531(4.1)%
S&P 500® average of month end1,4091,3573.8%1,21416.1%
MSCI EAFE® average of month end1,4741,4243.5%1,526(3.4)%
   (1)Includes assets under custody of $17.287 trillion, $16.387 trillion, and $15.714 trillion, as of period-end Q3 2012, Q2 2012 and Q3 2011, respectively.
(2)At period end.
 

The following table provides the components of operating-basis (non-GAAP) revenue(1) for the periods noted:

(Dollars in millions) Q3 2012 Q2 2012 

% Increase
(Decrease)

 Q3 2011 

% Increase
(Decrease)

Servicing fees$1,100$1,0861.3%$1,106(0.5)%
Investment management fees2512462.02299.6
Trading services revenue:
Foreign exchange trading115129(10.9)204(43.6)
Brokerage and other fees117 126 (7.1)130 (10.0)
Total trading services revenue232255(9.0)334(30.5)
Securities finance revenue91143(36.4)857.1
Processing fees and other revenue4548(6.3)90(50.0)
Net interest revenue, fully taxable-equivalent basis(1) (2)611629(2.9)5648.3
Gains (Losses) related to investment securities, net(1)18 19 (5.3)5 260.0 
Total Operating-Basis Revenue(1)$2,348 $2,426 (3.2)%$2,413 (2.7)%
   

(1)

Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.

(2)

Net interest revenue for the third and second quarters of 2012 and third quarter of 2011, presented in the table, included $32 million, $31 million and $32 million, respectively, of tax-equivalent adjustments, and excluded $40 million, $74 million and $46 million, respectively, of conduit-related discount accretion. GAAP-basis net interest revenue for these periods was $619 million, $672 million and $578 million, respectively. The Company continues to expect to record aggregate pre-tax conduit-related accretion of approximately $850 million in interest revenue from October 1, 2012 through the remaining terms of the former conduit securities. This expectation is based on numerous assumptions, including holding the securities to maturity, anticipated pre-payment speeds, credit quality and sales.
 

Servicing fees increased 1.3% to $1.1 billion in the third quarter of 2012 from the second quarter of 2012, reflecting strength in global equity markets and net new business. Compared to the third quarter of 2011, servicing fees decreased 0.5%, primarily due to the impact of a weaker Euro and business mix partially offset by market impact.

Investment management fees were $251 million, up 2.0% in the third quarter of 2012 from the second quarter of 2012, primarily due to stronger global equity markets. Compared to third quarter of 2011, management fees were up 9.6%, primarily due to stronger equity markets and net new business.

Trading services revenue, which includes foreign-exchange trading revenue and brokerage and other fees, was $232 million, down 9.0% from the second quarter of 2012 due to weakness in foreign-exchange and transition management. Trading services revenue decreased 30.5% from the third quarter of 2011, primarily due to weakness in foreign-exchange trading. Foreign-exchange trading revenue decreased 10.9% from the second quarter of 2012 and 43.6% from the third quarter of 2011, primarily due to lower volatility, partially offset by increased volumes. Brokerage and other fees decreased 7.1% to $117 million from the second quarter of 2012 due to weakness in transition management. Compared to the third quarter of 2011, brokerage and other fees decreased 10.0% due to weaker revenue from electronic foreign-exchange trading.

Securities finance revenue was $91 million, a decline of 36.4% from the second quarter of 2012, due primarily to second-quarter seasonality. Compared to the third quarter of 2011, securities finance revenue increased 7.1% due to higher spreads, offset partially by lower volumes.

Processing fees and other revenue declined 50.0% from the third quarter of 2011, primarily due to gains related to real estate and certain leases recorded in the third quarter of 2011 and amortization expenses related to tax-advantaged investments in renewable energy in the third quarter of 2012.

Fully taxable-equivalent net interest revenue was $611 million, a decrease of 2.9% from $629 million in the second quarter of 2012, primarily due to lower yields on earning assets. Compared to the third quarter of 2011, fully taxable-equivalent net interest revenue was up 8.3% from $564 million, largely driven by higher earning assets and lower funding costs, partially offset by lower asset yields.

Net interest margin, including excess deposits held at the Federal Reserve and other central banks, was 144 basis points in the third quarter of 2012 compared to 154 basis points in the second quarter of 2012 and 144 basis points in the third quarter of 2011.

Net gains from sales of available-for-sale securities of $24 million were recorded in the third quarter of 2012, and separately, $6 million of net losses from other-than-temporary impairment were recorded, resulting in $18 million of net gains related to investment securities.

The following table provides the components of operating-basis (non-GAAP)(1) expensesfor the periods noted:

(Dollars in millions) Q3 2012 Q2 2012 

% Increase
(Decrease)

 Q3 2011 

% Increase
(Decrease)

Compensation and employee benefits$916$942(2.8)%$965(5.1)%
Information systems and communications2112081.419110.5
Transaction processing services170172(1.2)180(5.6)
Occupancy115115119(3.4)
Other252 291 (13.4)258 (2.3)
Total Operating-Basis Expenses(1)$1,664 $1,728 (3.7)%$1,713 (2.9)%
   (1)Refer to the addendum included with this news release for explanations of our non-GAAP financial measures and for reconciliations of our operating-basis financial information.
 

Compensation and employee benefits decreased 2.8% from the second quarter of 2012 to $916 million and decreased 5.1% from third quarter of 2011. The decrease from both periods is primarily due to lower compensation and employee benefit costs associated with the continued implementation of the Business Operations and Information Technology Transformation program.

Information systems and communications were $211 million in the third quarter of 2012, up 10.5% from the third quarter of 2011, primarily due to costs related to activities transitioned in connection with the Business Operations and Information Technology Transformation program.

Transaction processing services declined 5.6% to $170 million in the third quarter of 2012 from the third quarter of 2011, primarily due to lower volumes in the investment servicing business.

Other expenses decreased 13.4% to $252 million in the third quarter of 2012 from the second quarter of 2012, primarily due to lower securities processing costs and professional fees.

Income Taxes

The effective tax rate on third-quarter 2012 GAAP earnings increased to 28.3% from 24.9% in the second quarter of 2012 due to the benefits associated with the 2008 Lehman Brothers bankruptcy. The effective tax rate on operating-basis earnings for the third quarter of 2012 was 24.5%, largely in line with 24.7% in the second quarter of 2012 and down from 27.0% in the third quarter of 2011, primarily due to the impact of an increase in tax-advantaged investments in renewable energy in 2012. The effective tax rate on operating-basis earnings for full-year 2012 is expected to be approximately 25.5%.

Capital

Capital ratios(1): 

September 30,
2012

 

June 30,
2012

 

bps Increase
(Decrease)

 

September 30,
2011

 

bps Increase
(Decrease)

Total capital ratio21.3%21.5%(20)bps19.5%180bps
Tier 1 capital ratio19.8%19.9%(10)bps17.9%190bps
Tier 1 leverage ratio7.6%7.7%(10)bps7.8%(20)bps
Tier 1 common ratio17.8%17.9%(10) Read Full Story

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