On a stated basis, State Street Corporation's (STT) fourth quarter 2014 (4Q14) earnings performance was down modestly relative to both the sequential and year-ago quarters. STT's return on average equity (ROE) was 10.4% in 4Q14, down modestly from 10.6% in 3Q14), and down from 10.9% in 4Q13.
On an operating basis, which excludes a few expenses related to litigation and restructuring, to name a few, the company's ROE was 11.6% in 4Q14, up from 11.4% in the sequential quarter, and 10.3% in the year-ago quarter. While this indicates the core franchise is performing satisfactorily, costs such as $50 million for litigation this quarter, and $42 million for restructuring costs, are significant, and continue to weigh on overall results.
STT's 4Q14 results were helped by improved market-based revenue including higher foreign exchange trading and securities finance revenue. On a stated basis, total trading revenue was up 5.4% from the sequential quarter and 24.2% from the year-ago quarter due to higher foreign exchange volatility over the course of the last quarter. In addition, securities finance revenue expanded 7.1% from the sequential quarter and 39.5% from the year-ago quarter. The improvement in these businesses was also evident in the results of competitors as well.
STT's asset servicing and management fee revenue were both down relative to the sequential quarter, but up moderately relative to the year-ago quarter on a stated basis. The sequential comparisons were the result in large part of a stronger U.S. dollar, which impacted foreign currency translation in STT's results.
Nevertheless the company still had some good new business to help offset the currency translation impact noted above. Total assets under custody and administration now amount to $28.19 trillion, down 1% from the sequential quarter, and up 2.8% from the year-ago quarter. Total assets under management now amount to $2.45 trillion, up 1.1% from the sequential quarter and 4.4% from the year-ago quarter.
Additionally, as expected, the company's net interest margin (NIM) continued to modestly grind down to 1.04% in 4Q14. Fitch would expect this to continue until short-term interest rates rise at some point in the future.
Expenses management continues to be an area of focus for STT's management. Due in large part to some of the non-core expenses noted above, STT did not achieve positive operating leverage relative to either the sequential or year-ago quarters. Fitch would also note that compensation expenses were up as well as processing fees, which had an impact on results.
Fitch continues to consider STT's capital position to be good, particularly in the context of its balance sheet composition. STT's fully-phased in Basel III Common Equity Tier 1 (CET1) ratio was 11.6% under the advanced approach, down from 11.7% in the sequential quarter. Under the fully phased-in standardized approach, the company's Basel III CET1 ratio was 10% in 4Q14.. Fitch would note that STT will be subject to the lower ratio of these two approaches.
STT is also subject to the Enhanced Supplementary Leverage Ratio (SLR), which on a fully phased-in basis at the holding company is estimated to be 5.2% at 4Q14, above its 5% required minimum and estimated at the main banking subsidiary to be 4.8% at 4Q14, below the 6% required minimum. Fitch would expect STT to take actions - such as working to reduce client deposit levels - such that both ratios are above required minimums when the rule eventually goes into effect.
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