CHICAGO--(BUSINESS WIRE)--State Street Corporation's (STT) third quarter 2014 (3Q'14) earnings were, on balance, more of the same, according to Fitch Ratings. Overall expense growth modestly outpaced revenue growth despite some continued growth in servicing and management fees as well as a pick-up in foreign exchange trading.
These results equated to a return on average equity (ROE) of 10.6% in 3Q'14 compared to 11.9% in the sequential quarter and 10.8% from the year-ago quarter. Fitch continues to note that while these results are satisfactory from a credit perspective, they remain below the company's long-term averages and Fitch's long-term cost of equity assumption for the company of approximately 12%.
STT's asset servicing and asset management revenue continues to expand primarily due to higher global equity markets and some new business wins, partially offset by a stronger U.S. dollar. Additionally, due to higher foreign exchange (fx) volatility, volumes and therefore fx revenue picked up during the quarter. Nevertheless, lower securities lending revenue, particularly relative to the sequential quarter, and lower processing revenue offset these increases.
Additionally, the company's net interest revenue (NIR) growth remains challenging amid the persistently low interest rate environment. STT's NIR grew 2% from the sequential quarter and 4% from the year-ago quarter due, in part, to higher levels of earning assets.
However, the company's net interest margin (NIM) continued to decline to 1.06% in 3Q'14, down from 1.12% in the sequential quarter and 1.27% in the year-ago quarter. The NIM decline was due in part to lower reinvestment rates as well as some mix shift in the securities portfolio in preparation for compliance with Liquidity Coverage Rule (LCR) which will go into effect in January 2015.
Fitch believes that STT will be in compliance with the LCR when it goes into effect next year.
Given the challenging interest rate environment, expense management remains a key lever management can pull to support the company's earnings. Expenses increased by 2.3% relative to the sequential quarter, and increased 9.9% relative to the year-ago quarter.
Fitch would expect management to continue to balance investing for future growth and absorbing higher regulatory and compliance costs with continuing to realize savings primarily from its Operations and Information Technology transformation program.
On balance, Fitch would not expect STT's earnings to meaningfully increase until short-term interest rates rise. In Fitch's view STT remains very sensitive to higher short-term interest rates.
Over time, STT's balance sheet has expanded as the company has continued to accumulate deposit balances as overall liquidity in the markets remains very high. This growth has proportionally been invested in the securities portfolio which remains highly rated, as well as some loans. To this end, STT has also started a comparatively small leveraged loan portfolio, which as of 3Q'14, amounts to $1.8 billion. To put in it context, though, the company's total balance sheet amounts to nearly $275 billion.
STT's capital position remains good. The company's estimated fully phased-in Basel III Common Equity Tier 1 (CET1) ratio under the Advanced Approach was 11.8% at 3Q'14, and under the Standardized Approach was 10.1%. STT will be subject to the lower ratio of these two approaches.
STT is also subject to the final Enhanced Supplementary Leverage Ratio (SLR), which at the holding company is estimated to be 5.7% at 3Q'14, above its 5.0% required minimum and at the main banking subsidiary estimated to be 5.4% at 3Q'14, below the 6.0% required minimum. Fitch would expect STT to take actions such that both ratios are above required minimums when the rule eventually goes into effect.
Additional information is available at 'www.fitchratings.com'.
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