8-K: State Street Reports Record EPS in Third Quarter, CFO to Step Down

State Street Corporation announced record earnings per share of $2.26 for the third quarter of 2024, alongside the planned departure of its CFO, Eric Aboaf.

Summary

• State Street Corporation reported a strong third quarter in 2024, achieving a record EPS of $2.26, which is up 81% year-over-year.
• Excluding notable items, the EPS was up 17% year-over-year.
• Total revenue reached $3.3 billion, a 21% increase year-over-year, or 9% excluding notable items.
• Fee revenue increased by 11%, or 7% excluding notable items, showing broad-based strength across the franchise.
• Net interest income (NII) rose by 16%, driven by higher investment securities yields and loan growth, partially offset by deposit mix shift.
• The company's total expenses were $2.3 billion, a 6% increase year-over-year, with business investments and revenue-related costs partially offset by productivity savings.
• State Street's pre-tax margin was 28.4%, with a return on average common equity (ROE) of 12.0% and a return on average tangible common equity (ROTCE) of 19.3%.
• The company achieved positive operating leverage of 15.2%pts, or 3.3%pts excluding notable items, and fee operating leverage of 4.9%pts, or 1.5%pts excluding notable items.
• Investment Servicing saw record assets under custody and/or administration (AUC/A) of $46.8 trillion at quarter-end, with $466 billion in new AUC/A wins and $2.4 trillion of AUC/A yet to be installed.
• New servicing fee revenue wins totaled $84 million, primarily from back office wins, and two new State Street Alpha mandates were reported, bringing the year-to-date total to five.
• Investment Management reported record assets under management (AUM) of $4.7 trillion at quarter-end and record net inflows of $100 billion, driven by record cash inflows and strength across both the ETF and Institutional businesses.
• State Street returned $674 million to common shareholders, including $450 million in share repurchases and $224 million in declared dividends, representing approximately 100% of net income available to common shareholders.
• The company's standardized common equity tier 1 (CET1) ratio was 11.6% at quarter-end, and the liquidity coverage ratio (LCR) for State Street Bank and Trust was 129%.

Sentiment

Score: 8

Explanation: The document presents a very positive outlook with strong financial results, record business metrics, and a commitment to returning capital to shareholders. The planned departure of the CFO is a minor negative, but the overall tone is optimistic and indicates a healthy business.

Positives

• State Street demonstrated strong financial performance with record EPS and significant revenue growth.
• The company experienced substantial business momentum across its Investment Servicing and Investment Management segments.
• State Street achieved record net inflows in Investment Management, indicating strong client demand.
• The company's capital position remains robust, with a solid CET1 ratio and LCR.
• State Street is actively returning capital to shareholders through share repurchases and dividends.
• The company's front office software and data business is showing strong growth with a 19% increase in ARR.
• State Street's Global Markets franchise was recognized with multiple awards in the Euromoney 2024 FX Awards.

Negatives

• The company's net interest margin decreased to 1.07% from 1.13% in the previous quarter.
• Total expenses increased by 6% year-over-year, driven by business investments and revenue-related costs.
• The company experienced a loss of $80 million in other income due to investment portfolio repositioning.
• The company's effective tax rate increased to 21.1% from 17.4% in the same quarter last year.

Risks

• The company's financial results are subject to market fluctuations and client activity.
• State Street faces intense competition in the financial services industry.
• The company's business is exposed to interest rate risk and credit risk of counterparties.
• The company's fee revenue is subject to decline based on market and currency fluctuations.
• State Street is subject to extensive and changing government regulations.
• The company's business may be affected by cyber-attacks or other disruptions to its technology infrastructure.
• The company's risk management framework may not be effective in identifying or mitigating all risks.

Future Outlook

State Street remains focused on delivering full-year positive fee and total operating leverage through continued execution and ongoing transformation and productivity improvement, as well as returning excess capital to its shareholders.

Management Comments

• Ron O'Hanley, Chairman and Chief Executive Officer, stated that they delivered strong financial performance and significant momentum across most business lines in the third quarter.
• O'Hanley noted that revenue performance reflected broad-based fee growth and higher NII, which drove positive fee and total operating leverage.
• O'Hanley highlighted the $466 billion of new AUC/A wins and two new Alpha mandates within Investment Services.
• O'Hanley also mentioned the record quarterly net inflows of $100 billion at Global Advisors, supported by a record quarter for their Cash business.
• O'Hanley expressed encouragement by the strength of the results, which enabled them to increase capital return relative to the prior quarter.

Industry Context

State Street's strong performance reflects a positive trend in the financial services industry, with increased market levels and client activity driving growth in assets under custody and management. The company's focus on technology and innovation, particularly with its Alpha platform, aligns with the industry's move towards digital solutions. The record net inflows in Investment Management also indicate a positive sentiment among investors.

Comparison to Industry Standards

• State Street's 19.3% ROTCE is strong compared to peers like Bank of New York Mellon which reported 13.5% ROTCE in their most recent quarter, indicating superior profitability.
• The 11.6% CET1 ratio is within the range of other large custodian banks, such as JP Morgan Chase, which reported a CET1 ratio of 13.8% in their most recent quarter, suggesting adequate capitalisation.
• State Street's 129% LCR for its bank subsidiary is higher than the regulatory minimum, and also higher than some peers, indicating a strong liquidity position.
• The $466 billion in new AUC/A wins is a significant achievement, demonstrating State Street's ability to attract new business in a competitive market, and is comparable to other large custodians such as Northern Trust, which reported $200 billion in new AUC/A wins in their most recent quarter.
• The $100 billion in net inflows for Investment Management is a strong result, and is comparable to BlackRock, which reported $110 billion in net inflows in their most recent quarter, indicating a strong market position.

Management Changes

Stakeholder Impact

• Shareholders will benefit from the strong financial performance and increased capital returns.
• Employees may experience changes due to the CFO transition and ongoing organizational process improvements.
• Clients will benefit from the company's strong business momentum and continued investment in technology.
• Creditors will be reassured by the company's strong capital position and liquidity.

Next Steps

• State Street will continue its succession plan with a formal internal and external search process for a new CFO.
• The company will continue to focus on delivering full-year positive fee and total operating leverage.
• State Street will continue to return excess capital to shareholders.
• The company will publish updates to its public disclosure regarding regulatory capital and liquidity ratios on its website.

Key Dates

Keywords

State Street, Earnings, EPS, AUC/A, AUM, Net Inflows, Investment Servicing, Investment Management, NII, CET1, LCR, Share Repurchases, Dividends, Operating Leverage, Fee Revenue, Front Office Software, Alpha, FX Trading