DBRS Confirms State Street Corporation at AA (low); State Street Bank and Trust Co. at AA; Trend Remains Stable

Dominion Bond Rating Service (DBRS) has today confirmed the ratings and Stable trend of State Street Corporation (STT or the Company) and its principal bank operating subsidiary – State Street Bank and Trust Company – as indicated in the table below. The rating action followed a review of STT’s operating performance and credit fundamentals.

STT continued to generate solid earnings growth in the first three quarters of 2006, further improved its profitability and liquidity, and maintained a strong overall credit profile. New fiduciary relationships and increased cross-selling to existing customers, together with generally favorable conditions in the global capital markets and rising asset valuations, underpinned STT’s good performance during this period, and support its positive earnings momentum heading into 2007.

The Company’s ratings are supported by leading global market positions in managing and servicing the financial assets of institutional investors, sustained healthy revenue and earnings growth, and a low risk profile. In its two principal business lines – custodial services with $11.3 trillion in custody, and asset management with $1.63 trillion under management (as of September 30, 2006) – STT has the third and fourth largest market positions, respectively, in the world. Custody and related services account for approximately 80% of revenues, and asset management and ancillary businesses for the balance.

The scope of these businesses yields substantial economies of scale relative to most of the Company’s competitors. Moreover, the Company’s market prowess is defensible due to the high barriers to entry, along with long-term contracts and multi-service relationships that anchor its client base.

STT’s risks primarily involve operating risks in its custody and transaction clearing businesses, and counterparty risk related to its trading and clearinghouse operations. Credit risk is minimal, given the small amount of loans carried and the mostly AAA quality of the securities portfolio. The Company’s systems and processes are sufficiently robust, and its staff properly trained and experienced to control these risks prudently.

The bulk of STT’s products are high volume, low unit cost and technology-intensive products that require large scale to produce acceptable returns. Given the very large amounts of assets handled, the Company has been able to produce acceptable risk-adjusted returns, while maintaining state-of-the-art-technology and broadening its product mix.

The parent company’s financial fundamentals are sound. Although double-leverage is modestly elevated at about 112% (at June 30, 2006), unencumbered liquidity is sufficient to meet all operating expenses and maturing debt obligations for at least one year without relying on dividends from the bank.

DBRS believes that continued stable earnings growth and improving core profitability could lead to positive rating consideration for the Company. On the other hand, weakening franchise strengths and declining core profitability could result in negative rating action.

Notes:
The Trust Preferred Securities contain certain unique covenants that give them some equity-like characteristics.
All figures are in U.S. dollars unless otherwise noted.