State Street (NYSE:STT) announced today that it has taken
actions to strategically reposition its investment portfolio by
selling investment securities of approximately $11 billion. The
primary asset classes and approximate amounts included in this
transaction were U.S. non-agency mortgage-backed ($4.1 billion) and
asset-backed securities ($3.7 billion), as well as non-U.S.
mortgage-backed ($2.5 billion) and asset-backed securities ($0.6
billion).
This transaction accomplishes several strategic objectives for
State Street, including:
- Increasing its balance sheet
flexibility in deploying its capital
- Enhancing its capital ratios under
evolving regulatory capital standards
- Reducing its exposure to certain asset
classes
The transaction will result in a pre-tax and after-tax loss of
approximately $350 million which will be recorded against earnings
in the fourth quarter of 2010. The after-tax loss approximates the
pre-tax loss due to the partial write-off of a deferred tax asset
associated with certain of the investment securities sold. The $350
million loss will be excluded from State Street’s operating-basis
financial results for 2010. The concentration of AAA and AA ratings
of the investment portfolio as of September 30, 2010, adjusted for
the repositioning, would have been approximately 88% versus 82%
prior to the repositioning.
The Company continues to expect full-year 2010 operating-basis
earnings per share to be slightly above the adjusted
operating-basis earnings per share recorded last year and confirms
its previously disclosed outlook for 2010 operating-basis net
interest margin to be slightly higher than 165 basis points. The
repositioning transaction included securities held prior to May
2009 by State Street’s asset-backed commercial paper conduits.
After giving effect to the transaction, State Street expects that
from October 1, 2010 forward the discount accretion from the
remaining securities will aggregate approximately $1.3 billion,
down from its previous estimate of $3.6 billion. This estimate
assumes the remaining securities are held to their maturities. It
also now expects to recognize about $175 million in discount
accretion in 2011, down from $550 million as previously estimated.
State Street expects the transaction to reduce its 2011
operating-basis net interest margin by approximately 5 to 10 basis
points from the level that may have been achieved had the
transaction not occurred. State Street’s operating-basis net
interest margin excludes discount accretion.
The table presented below provides State Street Corporation’s
specified capital ratios as of September 30, 2010 (1) on an actual
(unaudited) basis, and (2) on a pro-forma basis (a) adjusted to
reflect the estimated effect of the investment portfolio
repositioning transaction, described above, on Basel 1 capital
ratios calculated in accordance with regulatory requirements in
effect on September 30, 2010, and (b) adjusted to reflect both the
estimated effect of the above-described investment portfolio
repositioning and Basel III requirements proposed in September
2010. The “adjusted” ratios described in the preceding sub-clause
(b) reflect State Street’s good-faith estimate of the effects of
the applicable methodologies provided for in the Basel III
requirements as State Street understands them in light of the
published positions of the Basel Committee and the Federal Reserve
Board. See “Additional Information” below for additional
information concerning the specified capital ratios.
As of 09/30/10
Actual(unaudited)1under Basel I
Adjusted to reflect portfoliorepositioning
under Basel I 2
Adjusted to reflect bothportfolio
repositioningand Basel III proposal 2, 3
Total capital 17.1% 19.7%
11.0% Tier 1 capital 15.8% 18.2% 10.1% Tier 1 leverage 8.3% 8.0%
5.2% Tier 1 common 13.9% 16.0%
8.8%
(1) Actual (unaudited) total capital, tier 1 capital and tier 1
leverage ratios are calculated in accordance with presently
applicable bank regulatory requirements. Tier 1 common ratio is
calculated by dividing (a) tier 1 capital less non-common elements
including qualifying perpetual preferred stock, qualifying minority
interest in subsidiaries and qualifying trust preferred securities
(tier 1 common capital), by (b) total risk-weighted assets, which
are calculated in accordance with presently applicable bank
regulatory requirements. Actual (unaudited) tier 1 capital at
September 30, 2010, calculated in accordance with presently
applicable bank regulatory requirements, was $12.0 billion. To
calculate tier 1 common capital as of September 30, 2010, actual
(unaudited) tier 1 capital of $12.0 billion was reduced by
non-common elements of capital, composed of trust preferred
securities of $1.5 billion as of September 30, 2010, resulting in
tier 1 common capital of $10.5 billion. Actual (unaudited) total
risk-weighted assets as of September 30, 2010, calculated in
accordance with presently applicable bank regulatory requirements,
were $75.6 billion.
(2) All ratios were adjusted to give effect to the December 2010
sale of investment securities of approximately $11 billion, as part
of the repositioning of State Street’s investment portfolio,
including the related $350 million after-tax loss, announced in
this news release. As opportunities arise, State Street expects to
reinvest the proceeds from the sale through 2011 primarily in AAA
and AA asset-backed and mortgage-backed securities as well as U.S.
treasuries and agency securities. For purposes of these pro forma
adjustments, we have assumed that this investment portfolio
repositioning, including the related loss, occurred on September
30, 2010 and excludes the reinvestment of proceeds.
- As of September 30, 2010, actual
(unaudited) total risk-weighted assets, calculated in accordance
with presently applicable bank regulatory requirements, were $75.6
billion. For purposes of calculating the total capital, tier 1
capital and tier 1 common ratios solely to adjust for the portfolio
repositioning transaction, total risk-weighted assets as of
September 30, 2010 reflect a reduction of $11.9 billion, therefore
total risk-weighted assets used in the calculation were $63.7
billion ($75.6 billion less the reduction of $11.9 billion).
- Total risk-weighted assets are not used
in the calculation of the leverage ratio. That ratio uses
consolidated quarterly average total assets (as specified in
applicable bank regulations) in the denominator, which were $144.8
billion as of September 30, 2010 (actual, unaudited). For purposes
of calculating the leverage ratio only to reflect the portfolio
repositioning transaction, consolidated quarterly average total
assets were not affected.
- Also for purposes of ratios adjusted
only to reflect the portfolio repositioning transaction, actual
(unaudited) tier 1 capital as of September 30, 2010, calculated in
accordance with presently applicable bank regulatory requirements,
of $12.0 billion was reduced by the after-tax loss of $350 million,
resulting in tier 1 capital of $11.6 billion for these
purposes.
- The total capital ratio uses total
capital rather than tier 1 capital in the numerator. As of
September 30, 2010, actual (unaudited) total capital was $12.9
billion. For purposes of adjusting the total capital ratio solely
to reflect the portfolio repositioning transaction, total capital
of $12.6 billion was used, reflecting a reduction for the $350
million after-tax loss from the actual (unaudited) amount.
- For purposes of calculating the tier 1
common ratio only to reflect the portfolio repositioning
transaction, tier 1 common capital of $10.5 billion was reduced by
the $350 million after- tax loss to be $10.2 billion.
(3) For purposes of Basel III, (see below), total capital, tier
1 capital and tier 1 leverage ratios are calculated based on State
Street’s good-faith estimate of the applicable methodologies
provided for in the Basel III minimum capital standards announced
in September 2010 by the oversight body of the Basel Committee, as
State Street understands such requirements in light of the relevant
published positions of the Basel Committee and the Federal Reserve
Board. The tier 1 common ratio is calculated by dividing (a) tier 1
common capital (as described in footnote (1)), but with tier 1
capital determined in accordance with such requirements; by (b)
total risk-weighted assets, which are calculated in accordance with
Basel III. State Street reports its financial ratios in accordance
with the requirements of the Board of Governors of the Federal
Reserve System, which has not yet adopted Basel III. There remains
considerable uncertainty concerning the timing for adoption and
implementation of Basel III by the Federal Reserve Board. When
adopted, the Federal Reserve Board may implement Basel III with
some or more modifications or adjustments. Therefore, State
Street’s current understanding of Basel III, as reflected in the
table above, may be different from the ultimate application of
Basel III by the Federal Reserve Board to State Street.
- Total risk-weighted assets used in the
calculation of the total capital, tier 1 capital and tier 1 common
ratios were $105.9 billion, reflecting an increase of $42.2 billion
as a result of applying estimated Basel III requirements to the
adjusted risk-weighted assets of $63.7 billion described (and
reconciled to actual (unaudited) risk-weighted assets as of
September 30, 2010) in footnote (2) (which only reflect adjustments
for the portfolio repositioning transaction).
- Consolidated quarterly average total
assets used in the calculation of the leverage ratio were $204.8
billion, reflecting an increase of $60.0 billion as a result of
applying estimated Basel III requirements to the actual
consolidated quarterly average total assets as of September 30,
2010 of $144.8 billion.
- Tier 1 capital used in the calculation
of the tier 1 capital and leverage ratios was $10.7 billion,
reflecting a decrease of $.9 billion as a result of applying
estimated Basel III requirements to the adjusted tier 1 capital of
$11.6 billion described (and reconciled to actual (unaudited) tier
1 capital as of September 30, 2010) in footnote (2) (which only
reflects adjustments for the portfolio repositioning
transaction).
- Total capital used in the calculation
of the total capital ratio was $11.7 billion, reflecting a decrease
of $.9 billion as a result of applying estimated Basel III
requirements to the adjusted total capital of $12.6 billion
described (and reconciled to actual (unaudited) total capital as of
September 30, 2010) in footnote (2) (which only reflects
adjustments for the portfolio repositioning transaction).
- Tier 1 common capital used in the
calculation of the tier 1 common ratio was $9.4 billion, reflecting
the adjustments to tier 1 capital described in the third sub-bullet
of this footnote (3). Tier 1 common capital used in the calculation
is therefore calculated as adjusted tier 1 capital of $10.7 billion
less non-common elements of capital, composed of trust preferred
securities of $1.3 billion as of September 30, 2010, resulting in
tier 1 common capital of $9.4 billion.
Additional Information
This news release includes financial information presented on a
GAAP basis as well as on an operating basis. Operating-basis
financial information is a non-GAAP presentation. Management
measures and compares certain financial information on an operating
basis, as it believes that this presentation supports meaningful
comparisons from period to period and the analysis of comparable
financial trends with respect to State Street’s normal ongoing
business operations. Management believes that operating-basis
financial information, which reports revenue from non-taxable
sources on a fully taxable-equivalent basis and excludes the impact
of revenue and expenses outside of the normal course of business,
facilitates an investor’s understanding and analysis of State
Street’s underlying financial performance and trends in addition to
financial information prepared in accordance with GAAP.
This news release also includes capital ratios in addition to,
or adjusted from, those calculated in accordance with applicable
regulatory requirements. These include capital ratios based on tier
1 common capital and capital ratios adjusted to reflect the
portfolio repositioning announced in this news release and further
adjusted to also reflect our estimate of the application of the
Basel III capital requirements. These non-regulatory and adjusted
capital measures are non-GAAP financial measures. Based on the
effects of the portfolio repositioning and potential effects of the
proposed new Basel III capital requirements, management has
evaluated and, with respect to the Basel III-adjusted ratios, will
continue to evaluate the non-GAAP capital ratios presented in this
news release. Management believes that the use of the non-GAAP
capital ratios described in this news release aids an investor’s
understanding of State Street’s capital position in light of recent
developments and evolving capital requirements and therefore is of
interest to investors. The total capital, tier 1 risk-based capital
(or tier 1 capital) and tier 1 leverage ratios are capital ratios
used regularly by bank regulatory authorities to evaluate the
Company’s capital adequacy. The tier 1 risk-based common (or tier 1
common) ratio was used by the Federal Reserve in connection with
its 2009 Supervisory Capital Assessment Program. The tier 1 common
ratio is not required by GAAP or on a recurring basis by bank
regulations. Management is currently monitoring this ratio, along
with the other capital ratios described in this news release, in
evaluating State Street’s capital levels and believes that, at this
time, the ratio may be of interest to investors.
Non-GAAP financial measures (including capital ratios) should be
considered in addition to, not as a substitute for or superior to,
financial measures determined in accordance with GAAP.
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 $20.23 trillion in assets under custody and
administration and $1.90 trillion in assets under management at
September 30, 2010, State Street operates in 25 countries and more
than 100 geographic markets and employs approximately 28,000
worldwide. For more information, visit State Street’s web site at
www.statestreet.com or call +1 877/639-7788 [NEWS STT] toll-free in
the United States and Canada, or +1 678/999-4577 outside those
countries.
Forward-Looking Statements
This news release contains forward-looking statements as defined
by United States securities laws, including statements relating to
our goals and expectations regarding our business, financial
condition, results of operations, investment portfolio performance
and strategies, the financial and market outlook, governmental and
regulatory initiatives and developments, and the business
environment. Forward-looking statements are often identified by
such forward-looking terminology as "plan," "expect," "look,"
"believe," "anticipate," "estimate," "seek," "may," "will,"
"trend," "target,” and "goal," or similar statements or variations
of such terms. These statements are not guarantees of future
performance, are inherently uncertain, are based on current
assumptions that are difficult to predict and involve a number of
risks and uncertainties. Therefore, actual outcomes and results may
differ materially from what is expressed in those statements, and
those statements should not be relied upon as representing our
expectations or beliefs as of any date subsequent to December 9,
2010.
Important factors that may affect future results and outcomes
include, but are not limited to:
- the manner in which the Federal Reserve
implements the Dodd-Frank Act and Basel III, and whether State
Street is designated as systemically important for purposes of the
Dodd-Frank Act;
- material differences between the actual
required capital ratios under Basel III, as applicable to State
Street, when fully implemented by the Federal Reserve Board, and
the estimates of such ratios provided in the news release,
resulting in the need for substantial additional capital in the
future;
- changes in law or regulation that may
adversely affect our, our clients’ or our counterparties’ business
activities and the products or services that we sell, including
additional or increased taxes or assessments thereon, capital
adequacy requirements and changes that expose us to risks related
to compliance;
- financial market disruptions and the
economic recession, whether in the U.S. or internationally, and
monetary and other governmental actions, including regulation,
taxes and fees, designed to address or otherwise be responsive to
such disruptions and recession, including actions taken in the U.S.
and internationally to address the financial and economic
disruptions that began in 2007;
- increases in the volatility of, or
declines in the levels of, our net interest revenue, changes in the
composition of the assets on our consolidated balance sheet and the
possibility that we may be required to change the manner in which
we fund those assets;
- the financial strength and continuing
viability of the counterparties with which we or our clients do
business and to which we have investment, credit or financial
exposure;
- the liquidity of the U.S. and
international securities markets, particularly the markets for
fixed-income securities, and the liquidity requirements of our
clients;
- the credit quality, credit agency
ratings, and fair values of the securities in our investment
securities portfolio, a deterioration or downgrade of which could
lead to other-than-temporary impairment of the respective
securities and the recognition of an impairment loss in our
consolidated statement of income;
- the finalization and execution of our
previously announced planned global multi-year program designed to
enhance service excellence and innovation, deliver increased
efficiencies in our operating model and position us for accelerated
growth, including our ability to implement programs to transform
and improve technology and business processes and create
efficiencies, to develop constructive vendor, outsourcing and other
third-party relationships and to promote other business model
enhancement and cost savings initiatives; and increases in the
volatility of our GAAP-basis and operating-basis earnings resulting
from a change in our estimate of the charges or expenses necessary
to execute the planned global multi-year program and the resulting
savings from such program;
- the maintenance of credit agency
ratings for our debt and depository obligations as well as the
level of credibility of credit agency ratings;
- the risks that acquired businesses will
not be integrated successfully, or that the integration will take
longer than anticipated, that expected synergies will not be
achieved or unexpected disynergies will be experienced, that client
and deposit retention goals will not be met, that other regulatory
or operational challenges will be experienced and that disruptions
from the transaction will harm relationships with clients,
employees or regulators;
- the ability to complete acquisitions,
divestitures and joint ventures, including the ability to obtain
regulatory approvals, the ability to arrange financing as required,
and the ability to satisfy other closing conditions;
- the performance and demand for the
products and services we offer, including the level and timing of
redemptions and withdrawals from our collateral pools and other
collective investment products;
- the possibility of our clients
incurring substantial losses in investment pools where we act as
agent, and the possibility of further general reductions in the
valuation of assets;
- our ability to attract deposits and
other low-cost, short-term funding;
- potential changes to the competitive
environment, including changes due to the effects of consolidation
and perceptions of State Street as a suitable service provider or
counterparty;
- the level and volatility of interest
rates and the performance and volatility of securities, credit,
currency and other markets in the U.S. and internationally;
- our ability to measure the fair value
of the investment securities on our consolidated balance
sheet;
- the results of litigation, government
investigations and similar disputes or proceedings;
- our ability to control operating risks,
information technology systems risks and outsourcing risks, and our
ability to protect our intellectual property rights, the
possibility of errors in the quantitative models we use to manage
our business and the possibility that our controls will fail or be
circumvented;
- adverse publicity or other reputational
harm;
- our ability to grow revenue, attract,
retain and compensate highly skilled people, control expenses and
attract the capital necessary to achieve our business goals and
comply with regulatory requirements;
- the potential for new products and
services to impose additional costs on us and expose us to
increased operational risk;
- changes in accounting standards and
practices; and
- changes in the interpretation of
existing tax laws by U.S. and non-U.S. tax authorities that affect
the amount of taxes due.
Other important factors that could cause actual results to
differ materially from those indicated by any forward-looking
statements are set forth in our 2009 Annual Report on Form 10-K,
and our subsequent SEC filings. We encourage investors to read
these filings, particularly the sections on risk factors, for
additional information with respect to any forward-looking
statements and prior to making any investment decision. The
forward-looking statements contained in this presentation speak
only as of the date hereof, December 9, 2010, and we do not
undertake efforts to revise those forward-looking statements to
reflect events after that date.
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