DBRS Comments on State Street Acquisition of Intesa Sanpaolo’s Securities Services Business

DBRS has today commented that its ratings for State Street Corporation (State Street or the Company), including its Issuer & Senior Debt Rating of AA (low), are unchanged following the Company’s announcement of an agreement to acquire Intesa Sanpaolo’s Securities Services Business in Italy and Luxembourg for USD 1.87 billion (EUR 1.28 billion) in cash at closing. The trend on State Street’s ratings remains Negative, except for the Company’s Short-Term Instruments and Senior Notes, Guaranteed by FDIC which are Stable.

The proposed acquisition enhances State Street’s core asset servicing business with the addition of approximately USD 500 billion (EUR 343 billion) in average custody assets, EUR 173 billion in fund administration and additional depository and correspondent banking assets. Expected 2009 revenues of USD 427 million (EUR 293 million) from the acquired business approximate 5% of the Company’s USD 8.5 billion 2009 annualized revenue run rate. DBRS notes that with this acquisition, non-U.S. revenues will account for approximately 38% of all revenues and propel State Street closer to achieving its long-term goal of generating half of all revenues from outside the U.S.

The transaction is expected to lower the Company’s tangible common equity to 5.5% upon the expected closing in Q2 2010 subject to standard regulatory and other approvals. While the impact to capital is material, DBRS views the projected level as satisfactory (continuing to protect bondholders). Moreover, State Street has recently demonstrated its ability to generate capital both in the capital markets ($2.3 billion common stock issuance in May 2009) and organically (approximately 50 basis points per quarter).

The pre-tax merger and integration costs are expected to be approximately USD 120 million (EUR 80 million) taken over five years. Given the Company’s experience in integrating asset servicing businesses and a significant amount of redundancy, DBRS expects a smooth integration and achievement of the projected USD 90 million (EUR 60 million) in cost savings over 5 years. DBRS notes that net revenues from the transaction therefore are projected to increase from approximately USD 200 million to USD 290 million within 5 years.

The Negative trend on the Company’s ratings reflects DBRS’s view that earnings from fees and other revenues in its custody and trust businesses remain constrained due to lower activity volumes, the decline in asset values (that have partially recovered in the past few quarters), low interest rates and disrupted capital markets. DBRS also believes that the stressed investment climate has likely changed investor behaviors and will present new challenges to the Company’s ability to evolve its investment products and strategies to meet investor demand. While there are indications that the worst period of volatility and uncertainty may have already passed for trust banks, nevertheless, the unprecedented period of stress has left a legacy of potential issues to be resolved. These issues may result in unexpected expenses and add a degree of earnings volatility to State Street’s financial performance.

State Street’s ratings are underpinned by its large-scale, broad-range and global nature of its well-respected financial services offerings. With $13.3 trillion in assets under custody and $1.74 trillion in assets under management as of September 30, 2009, State Street enjoys a position as one of the world’s leading providers of financial services to institutional investors.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.