DBRS Confirms State Street Corporation’s Issuer Rating at AA (low); Trend Stable

DBRS, Inc. (DBRS) confirmed the ratings for State Street Corporation (State Street or the Company), including the Company’s Long-Term Issuer rating of AA (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, State Street Bank and Trust Company (the Bank). The trend for all ratings remains Stable. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

State Street’s ratings reflect its strong global franchise, with its leading market positions in custody and investment management, and diversified business model that generates significant recurring fee-based revenues, as well as a strong, low risk, and highly liquid balance sheet. The ratings also consider the operational and reputational risks associated with the important role State Street plays in the global financial markets that are growing increasingly complex.

State Street reported strong results for the first six months of 2017 (1H17), including $1.0 billion of net income applicable to common shareholders (ROE of 11.3%), which was up 14% from the year-ago period, delivering positive fee operating leverage. Specifically, total revenues increased 8% from 1H16, benefiting from favorable financial market conditions, including higher equity market values and the rise in short-term interest rates, as well as broad-based new business activity. Additionally, total expenses were 5% higher during 1H17, owing principally to higher compensation and employee benefits, including increased costs to support new business, higher incentive compensation and costs related to the acquisition of GE Asset Management (GEAM) operations, partially offset by State Street Beacon savings, the Company’s multi-year transformation program to digitize its businesses and lower firm-wide expenses.

Led by higher market values, assets under custody and/or administration (AUC/A) increased 12% over the past year, reaching a record $31.0 trillion. New business wins have been relatively consistent during this time, including $135 billion in 2Q17 and the Company noted that new business yet to be installed totaled $370 billion at quarter end, with the pipeline remaining robust. Meanwhile, assets under management (AUM) grew 13% versus the prior year to $2.6 trillion (also a record level), benefiting from market appreciation, as well as the acquisition of GEAM and associated follow on wins. DBRS notes that State Street experienced net outflows during 1H17, although its fee realization improved, reflecting a change in mix to higher-fee products.

DBRS views State Street’s funding and liquidity profile as very strong, underpinned by a sizable deposit base (represents 84% of total liabilities) and high-quality securities portfolio (40% of total assets). DBRS notes that 91% of the Company’s investment securities are rated at least AA, and its duration remains relatively short at 2.4 years. Meanwhile, State Street’s loan portfolio remains the smallest of the trust banks, but has been growing and currently represents 10% of assets. The Company’s higher risk $3.8 billion leveraged loan portfolio is largely comprised of BB and B credits (91% of the portfolio), though the size remains very manageable in DBRS’s view.

State Street’s capitalization remains sound, with a fully phased-in Basel III CET1 ratio under the Standardized Approach of 11% and a Supplementary Leverage ratio firmly above regulatory requirements. DBRS notes that the Federal Reserve did not object to State Street’s 2017 capital plan, which calls for the repurchase of up to approximately $1.4 billion shares and a dividend increase of approximately 11%.

State Street Corporation, a diversified financial services corporation headquartered in Boston, Massachusetts, reported $238.3 billion in consolidated assets as of June 30, 2017.

The Grid Summary Grades for State Street are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong; Capitalisation – Very Strong/Strong.

RATING DRIVERS
DBRS views State Street as comfortably placed within its rating category. Given the already high rating level, there is limited upside in the rating. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impact franchise strength, or the inability to consistently win new business could have negative rating implications.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael McTamney, Vice President – Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President – Global FIG
Initial Rating Date: 11 November 2005
Last Rating Date: 2 August 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.