State Street Reports First-Quarter 2019 Net Income of $508 Million

4/23/19

BOSTON--(BUSINESS WIRE)--Ronald O’Hanley, President and Chief Executive Officer:

“Our performance this quarter reflects the continued challenging conditions in the industry as well as lower client activity. We have seen these conditions before and know that focusing on what we can control, including better productivity, process re-engineering and greater resource discipline, while also strengthening client relationships, will deliver shareholder value and drive growth. The expense program we initiated in the fourth quarter of 2018 is already delivering benefits."

"Given the secular trends impacting our industry, we continue to prioritize strong service quality and innovation and are working to reignite servicing fee revenue growth through initiatives targeted at specific client segments and markets.”

“Reflecting our priorities, we also resumed share repurchases during the quarter, returning approximately $480 million of capital to shareholders in share repurchases and dividends, and believe we are well-positioned for the 2019 CCAR process.”

1Q19 HIGHLIGHTS
(all comparisons are to 1Q18, unless otherwise noted)

AUC/A and AUM

  • Investment Servicing AUC/A as of quarter-end decreased 2% primarily due to the impact of negative FX translation and a previously announced client transition
  • Investment Management AUM as of quarter-end increased 3% driven by higher equity markets, growth from institutional and ETF inflows, partially offset by year-end cash outflows

New Business

  • Investment Servicing mandates announced in 1Q19 totaled approximately $120 billion with quarter-end servicing assets remaining to be installed in future periods of approximately $310 billion
  • Investment Management inflows in 1Q19 of over $70 billion driven by institutional and cash inflows
  • Charles River Development (CRD): mandates in 1Q19 included annual contract value bookings of approximately $6 million

Revenues

  • Total revenue decreased 4%
  • Fee revenue decreased 6% reflecting lower servicing, management and markets revenues, partially offset by CRD
    • Continued strength in CRD with $99 million in revenues and $58 million in pre-tax income
  • Net interest income (NII) up 5% due to higher U.S. interest rates and disciplined deposit pricing, partially offset by lower deposits

Expenses

  • Total expenses increased approximately 1% primarily driven by the impact of the CRD acquisition, and technology infrastructure spend, partially offset by savings from new process re-engineering and resource discipline savings program
    • Excluding notable items, seasonal and CRD-related expenses, total expenses were down 2%
  • New expense savings program achieved $78 million total savings through resource discipline, process re-engineering and automation benefits
  • Total headcount decreased approximately 0.5% compared to 4Q18 driven by a reduction in high cost locations headcount

Capital

  • Returned approximately $480 million to common shareholders in 1Q19, consisting of $300 million common share repurchases and approximately $180 million in common dividends
  • Standardized Common Equity Tier 1 (CET1) of 11.5%, Tier 1 Leverage ratio of 7.4% and Supplementary Leverage Ratio (SLR) of 6.6% at quarter-end
  • Well-positioned for 2019 CCAR cycle with strong capital levels and a rebalanced investment portfolio

MARKET DATA, AUC/A AND AUM

The tables below provide a summary of selected financial information, key ratios, AUC/A, AUM, market indices and foreign exchange rates for the periods indicated as well as industry flow data for the indicated time periods.

Servicing fees decreased 12% compared to 1Q18 driven by challenging industry conditions including fee concessions and lower client activity and flows, weaker average equity market levels and a previously announced client transition, partially offset by new business. Servicing fees were down 3% compared to 4Q18 due to challenging industry conditions, partially offset by higher average equity market levels.

Management fees decreased 11% compared to 1Q18 reflecting product mix and weaker average equity market levels. Management fees were down 5% compared to 4Q18 driven by the impact of 4Q18 outflows and day count, partially offset by higher average equity market levels.

Foreign exchange trading services decreased 8%compared to 1Q18 due to lower client volumes and market volatility and 5% compared to 4Q18 due to lower market volatility.

Securities finance decreased 16% compared to 1Q18 reflecting balance sheet repositioning initiative in 3Q18 and 4Q18, and 2% compared to 4Q18 primarily due to the realized impact of 4Q18 client de-leveraging.

Processing fees and other increased compared to 1Q18 reflecting CRD revenue contribution, which we acquired in 4Q18, and a tax-advantaged lease sale. Processing fees and other were up 3% compared to 4Q18, largely driven by market-related adjustments on employee long-term incentive plans, partially offset by lower CRD revenue due to seasonality of renewals.

  • In 1Q19, CRD contributed $95 million of revenue

Net interest income increased 5% compared to 1Q18 primarily due to higher U.S. interest rates and disciplined deposit pricing, partially offset by lower average deposit balances. Net interest income declined 3% compared to 4Q18 due to lower deposits and day count, partially offset by the December 2018 Federal Reserve rate hike and an increase in the investment portfolio. Net interest margin (NIM) on a fully taxable-equivalent basis increased 14 basis points compared to 1Q18 due to higher U.S. interest rates, disciplined deposit pricing and lower interest-earning assets. Compared to 4Q18, NIM declined 1 basis point primarily due to lower non-interest bearing deposit levels.

Total expenses increased 1% compared to 1Q18, primarily driven by the impact of the CRD acquisition. Total expenses decreased 8% compared to 4Q18 driven by the lesser impact of notable items in 1Q19 compared to 4Q18, partially offset by seasonal expenses. Adjusted for notable items, seasonal expenses, and CRD, total expenses were down 2% compared to 1Q18(b).

Compensation and employee benefits decreased 2% compared to 1Q18 driven by savings from the new process re-engineering and resource discipline savings program as well as lower contract services costs, partially offset by annual merit increases. Compensation and employee benefits decreased 6% compared to 4Q18 due to the lesser impact of notable items in 1Q19 as well as lower headcount and fewer payroll days.

Information systems and communications increased 15% compared to 1Q18 largely reflecting technology infrastructure enhancements and investments to support business growth. Compared to 4Q18, information systems and communications increased 2% largely reflecting technology infrastructure enhancements.

Transaction processing services decreased 5% compared to 1Q18 due to lower sub-custodian costs and increased 7% versus 4Q18 due to the absence of prior quarter recoveries.

Occupancy decreased 3% compared to 1Q18 primarily driven by the advancement of the Company’s global footprint strategy. Occupancy expense decreased 21% compared to 4Q18 primarily due to the $25 million repositioning charge incurred in 4Q18.

Amortization of other intangible assets increased 20% compared to 1Q18 primarily due to the CRD acquisition. Amortization of other intangible assets decreased 26% compared to 4Q18 primarily due to the absence of accelerated amortization associated with a business exit in 4Q18.

Other expenses decreased 2% compared to 1Q18 primarily reflecting lower travel and insurance costs. Other expenses decreased 21% compared to 4Q18 primarily due to lower professional fees and travel costs.

The effective tax rate in 1Q19 was 20.1% compared to 16.4% in 1Q18 and 17.4% in 4Q18. Compared to 1Q18 and 4Q18, the effective tax rate increased due to reductions in benefits attributable to excess stock-based compensation, tax-exempt income and foreign tax credits.

Standardized CET1, Tier 1 and Total Capital ratios declined slightly compared to 4Q18 due to an increase in risk-weighted assets, partially offset by favorable mark-to-market adjustments.

Tier 1 Leverage ratio and SLR increased compared to 4Q18 due to favorable mark-to-market adjustments and a decline in adjusted average assets and SLR total assets, respectively.

Returned approximately $480 million to common shareholders in 1Q19 consisting of $300 million common share repurchases and approximately $180 million in dividends. Repurchased4.2 million common shares at quarter-end and declared 1Q19 quarterly common dividend of $0.47 per share.

Preliminary estimated average liquidity coverage ratio (LCR) for State Street Corporation of approximately 110% at quarter-end.

State Street intends to publish updates to its public disclosure regarding regulatory capital, as required by the Basel III final rule, and the liquidity coverage ratio, on a quarterly basis on its website at http://investors.statestreet.com/, under "Filings & Reports." Those updates will be published each quarter, during the period beginning after State Street's public announcement of its quarterly results of operations and ending on or prior to the due date under applicable bank regulatory requirements (i.e., ordinarily, ending no later than 60 days following year-end or 45 days following each other quarter-end, as applicable). For 1Q19, State Street expects to publish its updates during the period beginning today and ending on or about May 14, 2019.

State Street Corporation (NYSE: STT) is the world's leading provider of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $32,643 billion in assets under custody and administration and $2,805 billion* in assets under management as of March 31, 2019, State Street operates globally in more than 100 geographic markets and employs approximately 40,000 worldwide. For more information, visit State Street's website at www.statestreet.com.