DBRS, Inc. (DBRS Morningstar) confirmed the ratings of State Street Corporation (State Street or the Company), including the Company’s Long-Term Issuer Rating of AA. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, State Street Bank and Trust Company (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (high), 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.
KEY RATING CONSIDERATIONS
State Street’s ratings and Stable trend reflect the Company’s track record of stable, predictable and favorable results, as well as its low risk, strong balance sheet. State Street typically performs well in times of stress, as evidenced by its recent results, and even benefits from a deposit flight to quality, augmenting an already very liquid balance sheet.
Consistent with all trust banks, 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. Fee pressures within the Company’s businesses, lower interest rates and State Street’s planned acquisition of Brown Brothers Harriman & Co.’s (BBH) Investor Services business are also taken into consideration.
Given State Street’s very high rating level, a ratings upgrade is unlikely. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impacts franchise strength, or the inability to consistently win new business would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
State Street’s formidable franchise includes dominant or top-tier global positions in highly defensible businesses that generate a considerable amount of stable and recurring fee-based revenues. The Company is the second largest custodian in the world, or largest including the pending BBH Investor Services acquisition. In addition, State Street is the third-largest asset manager and provider of exchange-traded funds (ETFs) globally. We view these businesses as defensible and sustainable, considering their significant barriers to entry and that many of the related activities are critical to the functioning of financial markets, regardless of the business cycle stage.
Earnings Combined Building Block (BB) Assessment: Strong/Good
State Street reported a 10.8% return on equity in 9M21, up modestly from 10.6% in the prior year period. Total revenue increased 2% versus 9M20, with strong growth in servicing and management fees more than offsetting lower net interest revenue on lower rates. Meanwhile, noninterest expenses were essentially flat compared to the prior year period. As a result, the Company was able to generate positive operating leverage even in a difficult interest rate environment. Meanwhile, assets under custody and/or administration (AUC/A) grew 18% from a year ago to $43.3 trillion led by higher market levels, client flows and net new business growth. Similarly, assets under management (AUM) increased 23% to $3.9 trillion, benefiting from higher market levels and net inflows from ETFs and cash, partially offset by institutional net outflows.
Risk Combined Building Block (BB) Assessment: Very Strong/Strong
We view State Street’s risk profile as very strong, considering that its balance sheet is generally less risky than most financial institutions, but recognize the significant operational and reputational risks the Company faces given its important role in global financial markets. Credit risk remains very low, as the Company’s loan portfolio represents just 10% of total assets and is still the smallest of the trust banks. While State Street does have a riskier $4.7 billion leveraged loan portfolio, we view the risk as modest, as this portfolio comprises only 1.5% of total assets.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong
We consider the Company’s funding profile to be very strong, as deposits generated by the asset servicing and corporate trust operations provide a substantial and stable source of funds. Period-end deposits were up 31% from 3Q20 primarily due to high levels of liquidity in the system, but average balances declined 5% linked-quarter, as State Street continues to actively reduce excess deposits on its balance sheet. Meanwhile, the Company had $232 billion of cash and securities at the end of 3Q21, representing 72% of total assets, with approximately 92% of the securities portfolio rated at least AA (low).
Capitalization Combined Building Block (BB) Assessment: Strong
Consistent since inception, the Company remained a top performer in the Federal Reserve’s 2021 stress testing exercise, reflecting its lower risk balance sheet. At the end of 3Q21, State Street’s CET1 ratio was a strong 13.5%, up 120 basis points from YE20, reflecting higher retained earnings and the issuance of common stock to finance the planned acquisition of BBH Investor Services, partially offset by higher risk-weighted assets. Post close, the Company expects its CET1 ratio to be at the lower end of its targeted range of 10% to 11%, which we view as reasonable.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/388499.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com/
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277