State Street Reports Third-Quarter 2017 GAAP-Basis EPS of $1.66, Up 29% Compared to 3Q16, and ROE of 13.0%, Up 2.4% Points

BOSTON--(BUSINESS WIRE)--In announcing today’s financial results, Joseph L. Hooley, State Street’s Chairman and Chief Executive Officer, said, "Third-quarter results, including double-digit EPS growth and a meaningful increase in return on equity, reflect continued strength in equity markets and strong business momentum. We continue to develop new product solutions to support our clients' success, which in turn has helped drive new servicing commitments. Importantly, new business opportunities remain robust across both the asset servicing and asset management businesses."

Hooley added, "We remain well positioned to achieve our 2017 financial objectives, including those objectives associated with State Street Beacon, our multi-year program to digitize our business and provide insights to help our clients enhance their operational performance and risk management."

Hooley concluded, "While we continue to invest in our businesses, returning capital to our shareholders remains a key priority. In 3Q17, we purchased approximately $350 million of our common stock and declared a quarterly common stock dividend of $0.42 per share."

3Q17 Highlights

AUCA/AUM

• Broad-based business momentum: Asset servicing AUCA increased 10% compared to 3Q16, due to strength in equity markets and new business (4% growth compared to 2Q17). Asset management AUM increased 9% compared to 3Q16, driven by strength in equity markets (3% growth compared to 2Q17).
• New business: New asset servicing mandates during 3Q17 totaled approximately $105 billion.⁽¹⁾ Servicing assets remaining to be installed in future periods totaled approximately $390 billion at quarter-end.⁽¹⁾ In our asset management business, we experienced net outflows of $25 billion during 3Q17.

Revenue

• Fee Revenue: Increased from 3Q16, primarily driven by strength in servicing fees, management fees, securities finance revenue, and the impact of the weaker U.S. dollar, partially offset by lower trading services revenue
  • Servicing and Management fees: Benefiting from higher global equity markets and new business, servicing and management fees increased 4% and 14% compared to 3Q16, respectively
• Net interest income: Increased from 3Q16, driven by higher market interest rates in the U.S. and continued focus on the optimization of our liability mix

Expenses

• Expenses: Increased compared to 3Q16, primarily reflecting installation of new business, annual merit and performance based incentive compensation increases, and the impact of the weaker U.S. dollar, partially offset by Beacon savings
  • Beacon savings: Beacon remains on track to achieve at least $140 million in pre-tax savings in 2017, including $35 million of pre-tax savings achieved in 3Q17
  • Restructuring expenses: To achieve future cost savings and efficiencies, GAAP-basis 3Q17 results included $33 million, or $0.06 per share, in restructuring expenses related to Beacon

Capital

• Key Metrics: Estimated Basel III common equity tier 1 ratio for 3Q17 was 11.6% and our estimated leverage ratio increased to 7.4%, while delivering GAAP and operating-basis ROE of 13.0% and 13.4%, respectively

3Q17 GAAP-Basis Results

3Q17 Operating-Basis (Non-GAAP) Results

Operating-Basis (Non-GAAP) Financial Measures

In addition to presenting State Street's financial results in conformity with U.S. generally accepted accounting principles, or GAAP, management also presents results on a non-GAAP, or operating-basis, as it believes this presentation supports additional meaningful analysis and comparisons of trends with respect to State Street's business operations from period to period, as well as information, such as capital ratios calculated under regulatory standards scheduled to be effective in the future or other standards, that management uses in evaluating State Street’s business and activities. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in conformity with GAAP. Summary results presented on a GAAP-basis, descriptions of our non-GAAP, or operating-basis, financial measures, and reconciliations of operating-basis information to GAAP-basis information are provided in the addendum included with this News Release.

The following table reconciles select 3Q17 operating-basis financial information to financial information prepared and reported in conformity with GAAP for the same period. The addendum included with this News Release includes additional reconciliations.

3Q17 Selected Operating-Basis (Non-GAAP) Reconciliations

Selected Financial Information and Metrics

The tables below provide a summary of selected financial information and key ratios for the indicated periods.

The following table presents AUCA, AUM, market indices and average foreign exchange rates for the periods indicated.

Assets Under Management

The following table presents 3Q17 activity in AUM by product category.

The following table presents year-to-date activity for the period ended September 30, 2017 of AUM by product category.

Revenue

The following tables provide the components of our GAAP-basis and operating-basis revenue for the periods noted.

GAAP-Basis Revenue

Operating-Basis (Non-GAAP) Revenue

The following highlights primary drivers of changes in our 3Q17 revenue for the noted periods, indicating differences between our GAAP-basis and operating-basis results as appropriate.

Servicing fees increased from 3Q16, primarily due to higher global equity markets, new business and the impact of the weaker U.S. dollar. Compared to 2Q17, servicing fees increased, primarily due to the impact of higher global equity markets and the weaker U.S. dollar.

Management fees increased from 3Q16, primarily due to higher global equity markets, new business, and higher revenue yielding ETF inflows. Compared to 2Q17, management fees increased primarily due to higher global equity markets, higher revenue-yielding ETF inflows, and the impact of the weaker U.S. dollar.

Trading Services revenue decreased from 3Q16, primarily due to lower foreign exchange volatility, partially offset by higher client-related volumes. Compared to 2Q17, trading services revenue decreased primarily related to seasonality and low foreign exchange volatility.

Securities finance revenue increased from 3Q16, reflecting higher revenue from enhanced custody. Compared to 2Q17, securities finance revenue decreased, primarily due to 2Q17 seasonality.

Processing fees and other revenue was up slightly from 3Q16. Compared to 2Q17, processing fees and other revenue increased, primarily reflecting a gain related to the sale of an equity trading platform in 3Q17.

Net interest income increased from 3Q16, primarily due to higher U.S. market interest rates, loan portfolio growth, lower wholesale CD balances, and disciplined liability pricing, partially offset by a smaller balance sheet. Compared to 2Q17, NII increased primarily due to higher U.S. market interest rates and disciplined liability pricing, partially offset by a smaller balance sheet. GAAP-basis NII does not include a taxable equivalent adjustment. Net interest margin, calculated on an operating-basis, increased 29 basis points compared to 3Q16, and increased 8 basis points compared to 2Q17.

Expenses

The following tables provide the components of our GAAP-basis and operating-basis expenses for the periods noted.

GAAP-Basis Expenses

Operating-Basis (Non-GAAP) Expenses

The following highlights primary drivers of changes in our 3Q17 expenses for the noted periods, indicating differences between our GAAP-basis and operating-basis results as appropriate.

Compensation and employee benefits expenses increased from 3Q16, primarily due to increased costs to support new business, annual merit and performance based incentive compensation increases, and the impact of the weaker U.S. dollar, partially offset by Beacon savings. Compared to 2Q17, compensation and employee benefits expenses increased, primarily due to increased costs to support new business and the impact of the weaker U.S. dollar, partially offset by Beacon savings.

Information systems and communications expenses increased from 3Q16 and 2Q17. The increase from both periods is due to higher technology infrastructure costs, new business and Beacon investments.

Transaction processing services expenses increased from 3Q16 and 2Q17. The increase from both periods reflects higher client volumes.

Occupancy expenses increased from 3Q16, primarily due to a tax credit in 3Q16 and Beacon-related global footprint investments. Occupancy expenses increased from 2Q17, reflecting Beacon-related global footprint investments.

Other expenses decreased from 3Q16, primarily reflecting lower professional services fees. Other expenses decreased slightly from 2Q17.

3Q17 acquisition and restructuring costs of $33 million decreased from $42 million and $71 million compared to 3Q16 and 2Q17, respectively.

The 3Q17 GAAP-basis effective tax rate was 16.7% compared to 11.4% in 3Q16 and 20.1% in 2Q17. The 3Q17 rate reflects a decrease in alternative energy investments compared to 3Q16, and a change in the mix of earnings compared to 2Q17.

The 3Q17 operating-basis effective tax rate was 27.9% compared to 30.3% in 3Q16 and 31.4% in 2Q17. The 3Q17 operating rate reflects a decrease in alternative energy investments compared to 3Q16, and a change in the mix of earnings compared to 2Q17.

The following table presents our regulatory capital ratios as of September 30, 2017 and June 30, 2017. The lower of our capital ratios calculated under the Basel III advanced approaches and under the Basel III standardized approach are applied in the assessment of our capital adequacy for regulatory purposes. Also presented is the calculation of State Street's and State Street Bank's supplementary leverage ratio (SLR). Unless otherwise noted, all capital ratios presented in the table and elsewhere in this News Release refer to State Street Corporation and not State Street Bank and Trust Company.

Investor Conference Call and Quarterly Website Disclosures

State Street will webcast an investor conference call today, Monday, October 23, 2017, at 9:30 a.m. EST, available at http://investors.statestreet.com/. The conference call will also be available via telephone, at +1 877-423-4013 inside the U.S. or at +1 706-679-5594 outside of the U.S. The Conference ID is # 72483122.

Recorded replays of the conference call will be available on the website, and by telephone at +1 855-859-2056 inside the U.S. or at +1 404-537-3406 outside the U.S. beginning approximately two hours after the call's completion. The Conference ID is # 72483122.

The telephone replay will be available for approximately two weeks following the conference call. This News Release, presentation materials referred to on the conference call and additional financial information are available on State Street's website, at http://investors.statestreet.com/ under “Investor Relations--Investor News & Events" and under the title “Events and Presentations.”

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 3Q17, State Street expects to publish its updates during the period beginning today and ending on or about November 2, 2017.

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 $32.1 trillion in assets under custody and administration and $2.7 trillion* in assets under management as of September 30, 2017, State Street operates globally in more than 100 geographic markets and employs 36,303 worldwide. For more information, visit State Street's website at www.statestreet.com.

* Assets under management include the assets of the SPDR^® Gold ETF and the SPDR^® Long Dollar Gold Trust ETF (approximately $36 billion as of September 30, 2017), for which State Street Global Markets, LLC, an affiliate of SSgA, serves as the marketing agent.

Additional Information

In this News Release:

• All earnings per share amounts represent fully diluted earnings per common share.
• Return on average common shareholders' equity is determined by dividing annualized net income available to common equity by average common shareholders' equity for the period. Operating-basis return on average common equity utilizes annualized operating-basis net income available to common equity in the calculation.
• New business in assets to be serviced is reflected in our AUCA after we begin servicing the assets, and new business in assets to be managed is reflected in our AUM after we begin managing the assets. As such, only a portion of any new asset servicing and asset management mandate is reflected in our AUCA and AUM as of September 30, 2017. Distribution fees from the SPDR^® Gold ETF and the SPDR^® Long Dollar Gold Trust ETF are recorded in brokerage and other fee revenue and not in management fee revenue.
• State Street’s common stock and other stock dividends, including the declaration, timing and amount thereof, remain subject to consideration and approval by its Board of Directors at the relevant times. Stock purchases may be made using various types of mechanisms, including open market purchases under our announced common stock purchase program, accelerated share repurchases, or transactions off market, and may be made under Rule 10b5-1 trading programs. The timing of stock purchases, types of transactions and number of shares purchased will depend on several factors, including market conditions and State Street’s capital position, its financial performance and investment opportunities. The common stock purchase programs do not have specific price targets and may be suspended at any time.

Forward-Looking Statements

This News Release (and the conference call referenced herein) contains forward-looking statements within the meaning of United States securities laws, including statements about our goals and expectations regarding our business, financial and capital condition, results of operations, strategies, the financial and market outlook, dividend and stock purchase programs, governmental and regulatory initiatives and developments, and the business environment. Forward-looking statements are often, but not always, identified by such forward-looking terminology as “outlook,” “expect,” "priority," “objective,” “intend,” “plan,” “forecast,” “believe,” “anticipate,” “estimate,” “seek,” “may,” “will,” “trend,” “target,” “strategy” 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 October 23, 2017.

Important factors that may affect future results and outcomes include, but are not limited to:

• 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, including, for example, the direct and indirect effects on counterparties of the sovereign-debt risks in the U.S., Europe and other regions;
• increases in the volatility of, or declines in the level of, our NII, changes in the composition or valuation of the assets recorded in our consolidated statement of condition (and our ability to measure the fair value of investment securities) and the possibility that we may change the manner in which we fund those assets;
• the liquidity of the U.S. and international securities markets, particularly the markets for fixed-income securities and inter-bank credits, and the liquidity requirements of our clients;
• the level and volatility of interest rates, the valuation of the U.S. dollar relative to other currencies in which we record revenue or accrue expenses and the performance and volatility of securities, credit, currency and other markets in the U.S. and internationally; and the impact of monetary and fiscal policy in the United States and internationally on prevailing rates of interest and currency exchange rates in the markets in which we provide services to 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;
• our ability to attract deposits and other low-cost, short-term funding, our ability to manage levels of such deposits and the relative portion of our deposits that are determined to be operational under regulatory guidelines and our ability to deploy deposits in a profitable manner consistent with our liquidity needs, regulatory requirements and risk profile;
• the manner and timing with which the Federal Reserve and other U.S. and foreign regulators implement or reevaluate changes to the regulatory framework applicable to our operations, including implementation or modification of the Dodd-Frank Act, the Basel III final rule and European legislation (such as the Alternative Investment Fund Managers Directive, Undertakings for Collective Investment in Transferable Securities Directives and Markets in Financial Instruments Directive II); among other consequences, these regulatory changes impact the levels of regulatory capital we must maintain, acceptable levels of credit exposure to third parties, margin requirements applicable to derivatives, and restrictions on banking and financial activities. In addition, our regulatory posture and related expenses have been and will continue to be affected by changes in regulatory expectations for global systemically important financial institutions applicable to, among other things, risk management, liquidity and capital planning, resolution planning, compliance programs, and changes in governmental enforcement approaches to perceived failures to comply with regulatory or legal obligations;
• our resolution plan, submitted to the Federal Reserve and FDIC in June 2017, may not be considered to be sufficient by the Federal Reserve and the FDIC, due to a number of factors, including, but not limited to, challenges we may experience in interpreting and addressing regulatory expectations, failure to implement remediation in a timely manner, the complexities of development of a comprehensive plan to resolve a global custodial bank and related costs and dependencies. If we fail to meet regulatory expectations to the satisfaction of the Federal Reserve and the FDIC in our resolution plan submission filed in June 2017 or any future submission, we could be subject to more stringent capital, leverage or liquidity requirements, or restrictions on our growth, activities or operations;
• adverse changes in the regulatory ratios that we are required or will be required to meet, whether arising under the Dodd-Frank Act or the Basel III final rule, or due to changes in regulatory positions, practices or regulations in jurisdictions in which we engage in banking activities, including changes in internal or external data, formulae, models, assumptions or other advanced systems used in the calculation of our capital ratios that cause changes in those ratios as they are measured from period to period;
• requirements to obtain the prior approval or non-objection of the Federal Reserve or other U.S. and non-U.S. regulators for the use, allocation or distribution of our capital or other specific capital actions or corporate activities, including, without limitation, acquisitions, investments in subsidiaries, dividends and stock purchases, without which our growth plans, distributions to shareholders, share repurchase programs or other capital or corporate initiatives may be restricted;
• changes in law or regulation, or the enforcement of law or regulation, that may adversely affect our business activities or those of our clients or our counterparties, and the products or services that we sell, including additional or increased taxes or assessments thereon, capital adequacy requirements, margin requirements and changes that expose us to risks related to the adequacy of our controls or compliance programs;
• economic or financial market disruptions in the U.S. or internationally, including those which may result from recessions or political instability; for example, the U.K.'s decision to exit from the European Union may continue to disrupt financial markets or economic growth in Europe or, similarly, financial markets may react sharply or abruptly to actions taken by the new administration in the United States;
• our ability to develop and execute State Street Beacon, our multi-year transformation program to digitize our business, deliver significant value and innovation for our clients and lower expenses across the organization, any failure of which, in whole or in part, may among other things, reduce our competitive position, diminish the cost-effectiveness of our systems and processes or provide an insufficient return on our associated investment;
• our ability to promote a strong culture of risk management, operating controls, compliance oversight, ethical behavior and governance that meets our expectations and those of our clients and our regulators, and the financial, regulatory, reputation and other consequences of our failure to meet such expectations;
• the impact on our compliance and controls enhancement programs of the appointment of a monitor under the deferred prosecution agreement with the DOJ and compliance consultant appointed under a settlement with the SEC, including the potential for such monitor and compliance consultant to require changes to our programs or to identify other issues that require substantial expenditures, changes in our operations, or payments to clients or reporting to U.S. authorities;
• the results of our review of our billing practices, including additional amounts we may be required to reimburse clients, as well as potential consequences of such review, including damage to our client relationships and adverse actions by governmental authorities;
• the results of, and costs associated with, governmental or regulatory inquiries and investigations, litigation and similar claims, disputes; or civil or criminal proceedings;
• changes or potential changes in the amount of compensation we receive from clients for our services, and the mix of services provided by us that clients choose;
• the large institutional clients on which we focus are often able to exert considerable market influence, and this, combined with strong competitive market forces, subjects us to significant pressure to reduce the fees we charge, to potentially significant changes in our AUCA or our AUM in the event of the acquisition or loss of a client, in whole or in part, and to potentially significant changes in our fee revenue in the event a client re-balances or changes its investment approach or otherwise re-directs assets to lower- or higher-fee asset classes;
• the potential for losses arising from our investments in sponsored investment funds;
• the possibility that our clients will incur substantial losses in investment pools for which we act as agent, and the possibility of significant reductions in the liquidity or valuation of assets underlying those pools;
• our ability to anticipate and manage the level and timing of redemptions and withdrawals from our collateral pools and other collective investment products;
• the credit agency ratings of our debt and depositary obligations and investor and client perceptions of our financial strength;
• adverse publicity, whether specific to State Street or regarding other industry participants or industry-wide factors, or other reputational harm;
• our ability to control operational risks, data security breach risks and outsourcing risks, 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 prove insufficient, fail or be circumvented;
• our ability to expand our use of technology to enhance the efficiency, accuracy and reliability of our operations and our dependencies on information technology and our ability to control related risks, including cyber-crime and other threats to our information technology infrastructure and systems (including those of our third-party service providers) and their effective operation both independently and with external systems, and complexities and costs of protecting the security of such systems and data;
• our ability to grow revenue, manage expenses, attract and retain highly skilled people and raise the capital necessary to achieve our business goals and comply with regulatory requirements and expectations;
• changes or potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation and perceptions of State Street as a suitable service provider or counterparty;
• our ability to complete acquisitions, joint ventures and divestitures, including the ability to obtain regulatory approvals, the ability to arrange financing as required and the ability to satisfy closing conditions;
• the risks that our acquired businesses and joint ventures will not achieve their anticipated financial and operational benefits or will not be integrated successfully, or that the integration will take longer than anticipated, that expected synergies will not be achieved or unexpected negative synergies or liabilities 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 our relationships with our clients, our employees or regulators;
• our ability to recognize evolving needs of our clients and to develop products that are responsive to such trends and profitable to us, the performance of and demand for the products and services we offer, and 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 tax legislation and 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 2016 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 News Release should not by relied on as representing our expectations or beliefs as of any time subsequent to the time this News Release is first issued, and we do not undertake efforts to revise those forward-looking statements to reflect events after that time.