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
The ratings and Stable trend reflect State Street’s powerful global franchise, with dominant or top-tier positions in highly defensible businesses that generate a considerable amount of stable and recurring fee-based revenues.
These also reflect the Company’s track record of stable, predictable and favorable results, as well as its low risk, strong 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 increasingly complex global financial markets. Fee pressures within the Company’s businesses due to lower market valuations, rising interest rates’ impact on income and securities portfolio valuations, and State Street’s decision to end efforts to acquire Brown Brothers Harriman & Co.’s (BBH) Investor Services 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 impact franchise strength would result in a ratings downgrade. In addition the inability to consistently manage client retention and win new business would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
State Street is the second largest custodian globally. In addition, State Street is the fourth-largest global asset manager and provider of exchange-traded funds (ETFs). 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 10.9% return on equity in 9M22, up modestly from 10.8% in the prior year period. Total revenue was flat versus 9M21, with strong growth in net interest revenue offsetting lower fee revenues in both investment servicing and asset management due mainly to lower market valuations. Meanwhile, noninterest expenses were essentially flat compared to the prior year period. As a result, the Company held firm year over year in terms of operating profitability, and was also supported by a lower tax rate. Meanwhile, assets under custody and/or administration (AUC/A) decreased 18% from a year ago to $35.7 trillion on lower market levels, FX translation effects, some previously announced client attrition, offset somewhat by net new business growth. Similarly, assets under management (AUM) decreased 15% to $3.3 trillion, pressured by lower market levels, FX effects, and institutional net outflows, offset partially by ETF and Cash net inflows.
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 12% of total assets and is still the smallest of the trust banks. State Street’s leveraged loan portfolio remains at about 1% of total assets. As of September 30, 2022, short term secured loans comprised 57% of loans.
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 at 3Q22 were down 8.1% from 3Q21 due to increasing interest rates and moves from cash deposits to higher yielding assets such as money market funds. State Street worked last year to actively reduce excess deposits on its balance sheet, and deposit betas (measuring the rate of increase in deposit costs due to market pressures) are expected to continue to increase as long as interest rates are moving higher. Meanwhile, the Company had $208 billion of cash and securities at the end of 3Q22, representing 69% of total assets, with approximately 96% of the securities portfolio rated at least AA (low).
Capitalisation Combined Building Block (BB) Assessment: Strong
In the past four years, the Company has been a top performer in the Federal Reserve’s stress testing exercise, reflecting its lower risk balance sheet, after addressing counterparty risk issues identified in the 2018 Stress Test. At the end of 3Q22, State Street’s CET1 ratio was a strong 13.2%, moderating only slightly from 3Q21 level of 13.5%, and reflecting higher retained earnings and the issuance of common stock in 3Q21 to finance the planned acquisition of BBH Investor Services, partially offset by higher risk-weighted assets. The Company has announced plans to boost its share buybacks further in 4Q22 to $1.5 billion, after announcing its decision to end efforts to acquire BBH Investor Services Inc. STT has retained its target CET1 ratio of 10-11%, giving an ample cushion over its 8% current CET1 requirement.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/407343/state-street-corporation-intrinsic-assessment-framework.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/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 (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/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. DBRS Morningstar considers the
information available to it for the purposes of providing this rating was of satisfactory quality.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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.
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