Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDRs) of State Street Corporation (State Street) and its primary subsidiary State Street Bank and Trust Company at 'A+'. The Rating Outlook is Stable. Support ratings and support floors and support floors of State Street and SSBT remain on Rating Watch Negative. A complete list of ratings follows at the end of this release.
Today's rating action reflects State Street's global franchise in investment services and investment management, consistent earnings, low risk balance sheet, good liquidity and solid capital position.
Past risk management issues continue to constrain ratings, although management has largely been successful in improving risk monitoring systems and defining the corporation's risk appetite. Lawsuits regarding investments in active fixed income funds have been settled and off-balance-sheet conduits have been brought on balance sheet. Still, State Street faces new lawsuits by investors regarding its pricing of foreign currency transactions as well as lingering litigation and regulatory investigations regarding redemption restrictions on pooled securities lending collateral pools. Fitch believes that State Street has sufficient financial flexibility to absorb any litigation losses and penalties.
On an operating basis (excluding charges to consolidate off-balance-sheet conduits) State Street has been consistently profitable. Still, returns on equity and earning growth are not as strong as in the pre-crisis environment of 2005-2007. Management has initiated a technology and operations streamlining project which should improve overall pretax margins when fully implemented, and should also enhance client service.
Investment portfolio quality is sound after a repositioning in fourth quarter 2010 (4Q'10) reduced risk. Issues rated 'AAA' or 'AA' were approximately 89% of total holdings at 3Q'11. Loan portfolio quality is also good. The balance sheet is also quite liquid as State Street's core businesses provide stable sources of funding.
Capital levels are well above State Street's historical range, with tangible common equity at 7.1% and Tier I common at 16.0% under Basel I rules. Management calculates Tier I common under prospective Basel III rules at 11.7%, well above the minimum threshold and any buffer needed for global systemically important financial institutions.
The global nature of State Street's businesses creates exposure to eurozone banks, whether through direct short-term investments and counterparty exposure, or through indirect investments in investments of sponsored money market funds and collateral pools. Management has taken steps to measure aggregate exposure levels, and Fitch believes the overall level is manageable. Most of the exposure is in the stronger eurozone countries, with risk to peripheral countries such as Greece and Portugal relatively low.
The Rating Outlook is Stable. Over the longer term, progress in improving risk management systems and reducing the firm's risk profile could result in upward ratings momentum. Current downside risks include the potential for significant litigation losses in foreign exchange trading as well as contagion from eurozone bank exposures.
The support ratings and support floors of State Street and lead bank SSBT are maintained on Rating Watch Negative where they were originally placed on Oct. 22, 2010. Support ratings and support floors of a number of other large U.S. banks were also placed on Rating Watch Negative at that time due to changes in the regulatory environment. Please refer to Fitch's press release on that date titled 'Fitch: US FI Ratings Potentially Impacted by Proposed New FDIC Rules', available at 'www.fitchratings.com' for additional information.
State Street, based in Boston, MA, is the world's largest institutional investment manager and the third largest global custodian.
Fitch has taken the following rating actions:
State Street Corporation
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Viability rating affirmed at 'a+';
--Individual affirmed at 'B';
--Support of '1' maintained on Rating Watch Negative;
--Support Rating Floor of 'A+' maintained on Rating Watch Negative;
--Commercial paper affirmed at 'F1+';
--Junior subordinated debt affirmed at 'A-';
--Long-term FDIC guaranteed debt affirmed at 'AAA'
--Long-term senior debt affirmed at 'A+';
--Rating Outlook Stable.
State Street Bank and Trust Company
--Long-term IDR affirmed at 'A+';
--Short-term IDR affirmed at 'F1+';
--Viability rating affirmed at 'a+';
--Individual affirmed at 'B';
--Support of '1' maintained on Rating Watch Negative;
--Support Rating Floor of 'A+' maintained on Rating Watch Negative;
--Long-term deposits affirmed at 'AA-';
--Short-term deposits affirmed at 'F1+';
--Long-term subordinated affirmed at 'A'
--Rating Outlook Stable.
State Street Capital I
State Street Capital IV
--Trust Preferred Securities affirmed at 'A-'.
State Street Capital III
-- Preferred Stock affirmed at 'A-'.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
This rating action reflects the application of Fitch's current criteria which is available on Fitch's web site at 'www.fitchratings.com' and specifically includes:
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2011);
--'Bank Holding Companies' (Aug. 16, 2011);
--'Investment Managers and Alternative Funds Criteria' (Dec. 23, 2010).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171
Bank Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648612
Investment Manager and Alternative Funds Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=590125
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Media Relations,
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brian.bertsch@fitchratings.com
or
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Analyst:
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Senior Director
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Chicago, IL 60602
or
Secondary Analyst:
Joe
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Senior Director