State Street Corporation · NYSE:STT
State Street — Lehman Financial Services Conference 2008
61 slides from State Street's conference presentation, May 19, 2008
Slide 1: Building a Strong Growth Company
0 BUILDING A STRONG GROWTH COMPANY Ronald E. Logue Chairman and Chief Executive Officer Lehman Financial Services Conference 20 May 2008
Slide 2: Agenda
1 Annual Shareholders v02 Building a Strong Growth Company Achieving 2007 Goals Positioning for Future Growth Updating Financials Continuing the Momentum Agenda
Slide 3: Forward-looking statements
2 Annual Shareholders v02 This presentation contains forward-looking statements as defined by United States securities laws, including statements about our financial goals and expectations, strategic objectives, financial and industry outlook and business environment, as well as about integration, c
Slide 4: Achieving 2007 Goals
ACHIEVING 2007 GOALS
Slide 5: EPS, ROE and Revenue growth 2002-2007
4 Annual Shareholders v02 0.00 1.00 2.00 3.00 4.00 5.00 Earnings per Share (EPS) 0 2 4 6 8 10 12 14 16 18 Return on Equity (ROE) 0 3 6 9 Revenue 5-yr. CAGR* = 17.5% 5-yr. CAGR* = 17.3% $ % $ in billions ’02 ’03 ’04 ’05 ’06 ’07 ’02 ’03 ’04 ’05 ’06 ’07 ’02 ’03 ’04 ’05 ’06 ’07 Building a Strong Growth
Slide 6: Competitive Analysis (2007 vs. 2006)
5 Annual Shareholders v02 20.4% 19.6% 24.8% 33.8% State Street (ex IFIN) 19.7% 16.5% 16.7% 22.0% Northern Trust 13.1% 13.4% 17.9% 28.0% The Bank of New York Mellon** 17.7% 27.0% 32.1% 32.1% State Street ROE Expense Growth Revenue Growth EPS Growth* Company* Building a Strong Growth Company *EPS grow
Slide 7: Positioning for Future Growth
POSITIONING FOR FUTURE GROWTH
Slide 8: Positioning for Future Growth
7 Annual Shareholders v02 Building a Strong Growth Company New Revenue Streams Successful Integration Geographic Reach Core Business Strength Customer Growth GROWTH Positioning for Future Growth
Slide 9: Positioning for Future Growth
8 Annual Shareholders v02 Building a Strong Growth Company New Revenue Streams Successful Integration Geographic Reach Core Business Strength Customer Growth GROWTH Positioning for Future Growth
Slide 10: Core Business Strength: Revenue 2002 vs 2007
9 Annual Shareholders v02 Management Fees Processing and Other Trading Services Securities Finance NIR Servicing Fees 1,454 3,388 1,021 226 432 1,152 237 405 1,141 1,788 681 172 0 1,500 3,000 4,500 6,000 7,500 9,000 2002 2007 21% 3% 8% 14% 14% 40% 61% $8,387 $3,710 Revenue in millions $ 67% Building
Slide 11: Account balances and assets under custody
10 Annual Shareholders v02 Building a Strong Growth Company 0 40 80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 10 20 TOTAL NON-US INTEREST-BEARING TRANSACTION AND US NON-INTEREST-BEARING ACCOUNT BALANCES AND TOTAL ASSETS UNDER CUSTODY Total non-US interest-bearing transaction & US
Slide 12: Geographic Reach
11 Annual Shareholders v02 Building a Strong Growth Company Core Business Strength New Revenue Streams Successful Integration Geographic Reach Customer Growth GROWTH Positioning for Future Growth Geographic Reach
Slide 13: Geographic Reach: Non-US revenue and employees
12 Annual Shareholders v02 Building a Strong Growth Company Positioning for Future Growth Geographic Reach 35% 9,506 24% 4,546 Non-US Employees/Employees 41% $3.4B 24% $1.1B Non-US Revenue 26% 11% 4% $2.2B $0.9B $0.3B 9% 7% 8% $0.4B $0.3B $0.4B – Europe – Asia Pacific – Other North America % Non-US
Slide 14: Asia-Pacific revenue and market growth
13 Annual Shareholders v02 Building a Strong Growth Company Positioning for Future Growth Geographic Reach STATE STREET REVENUE GROWTH 2003–2007 CAGR: 29% Asia-Pacific Region COLLECTIVE, PENSION AND GOVERNMENT MARKET GROWTH 2003–2007 CAGR: 16% $8.2T 2003 $328M 2003 $14.8T 2007 $906M 2007 Sources: Al
Slide 15: Europe revenue and market growth
14 Annual Shareholders v02 Building a Strong Growth Company Europe Positioning for Future Growth Geographic Reach STATE STREET REVENUE GROWTH 2003–2007 4-YEAR CAGR: 28% COLLECTIVE, PENSION AND INSURANCE MARKET GROWTH 2003–2007 4-YEAR CAGR: 10% Sources: Cerulli, Allianz, DWS, CEA, and State Street es
Slide 16: Successful Integration
15 Annual Shareholders v02 Building a Strong Growth Company Positioning for Future Growth Successful Integration Core Business Strength Successful Integration Geographic Reach New Revenue Streams Customer Growth GROWTH
Slide 17: Successful Integration of acquisitions
16 Annual Shareholders v02 Building a Strong Growth Company EPS impact and achievement excludes merger and integration costs in 2003 and 2007. Leadership in hedge fund servicing Strategy Slightly accretive Slightly dilutive 99% IFS 2002 EPS Achieved in Year One EPS Impact Targeted in Year One Revenu
Slide 18: Customer Growth
17 Annual Shareholders v02 Building a Strong Growth Company Positioning for Future Growth Customer Growth Core Business Strength Successful Integration Geographic Reach Customer Growth New Revenue Streams GROWTH
Slide 19: Customer Growth: Extending Market Leadership
18 Annual Shareholders v02 Building a Strong Growth Company > Added 60 new customers > Combined with IFIN, State Street services 85 private-equity customers with $87 billion in assets, as of 12/31/07 Palmeri > Added 50 new customers > Expanded relationships with 15 of State Street’s top 100 customer
Slide 20: New Revenue Streams
19 Annual Shareholders v02 Building a Strong Growth Company Core Business Strength New Revenue Streams Successful Integration Geographic Reach Customer Growth Positioning for Future Growth New Revenue Streams GROWTH
Slide 21: New Revenue Streams: Our Strategy
20 Annual Shareholders v02 Building a Strong Growth Company Positioning for Future Growth New Revenue Streams Kuwait Investment Authority Provide investment management and servicing for highly complex pools of assets Sovereign Wealth Funds Added 29 new customers since Currenex acquisition Provide ra
Slide 22: Annual Shareholders v02 [LOGO]
21 Annual Shareholders v02 [LOGO]
Slide 23: Reviewing Financials Agenda
22 Annual Shareholders v02 Building a Strong Growth Company Reviewing Financials Agenda Investment Portfolio Conduit Update Capital Structure Outlook for Net Interest Revenue and Net Interest Margin
Slide 24: Annual Shareholders v02 [LOGO]
23 Annual Shareholders v02 [LOGO]
Slide 25: Investment Portfolio (period end 3/31/08)
24 Annual Shareholders v02 Asset-backed securities Mortgage-backed securities Commercial mortgage-backed securities $25 billion $40 billion $10 billion Corporate bonds Municipals Treasuries Agency debentures Agency mortgages Small Business Administration loans Building a Strong Growth Company Invest
Slide 26: Investment Portfolio Detail
25 Annual Shareholders v02 Building a Strong Growth Company > 94%AAA / AA rated > Constructed to perform well through periods of economic weakness > Unrealized after-tax MTM = $(1.9)B at 3/31/08 > Assets selected using rigorous credit process > Diversified by asset class and geography > Minimal down
Slide 27: Investment Portfolio (end of period)
26 Annual Shareholders v02 Building a Strong Growth Company $0 $201M $1,076M $152M — — — Q1 Asset Value 459 11 16 18 5 Downgrades 0 8 13 $(684)M 88.5% AAA 6.5% AA $75.7B Q4 7 1 2 2 Credit watch 0 0 0 0 Defaults 15 5 7 2 Downgrades ex Munis $(1,940)M $(513)M $(392)M $(190)M Unrealized after-tax MTM g
Slide 28: Annual Shareholders v02 [LOGO]
27 Annual Shareholders v02 [LOGO]
Slide 29: Conduit Update
28 Annual Shareholders v02 Building a Strong Growth Company Conduit Update > State Street sponsors four ABCP conduits – Conduit A (A1/P1) – US assets, approx. $10.8 billion USD – USD denominated ABCP – Conduit B (A1/P1) – US and European assets, approx. $11.6 billion USD – USD, GBP and EUR denominat
Slide 30: Conduit Update
29 Annual Shareholders v02 Building a Strong Growth Company Conduit Update **Source: Moody’s Investor Service; Data as of 12/31/07 *NR Assets in State Street-Sponsored Conduits reflect structured transactions. These transactions have been reviewed by rating agencies and have been structured to maint
Slide 31: Conduit Update: Key Metrics
30 Annual Shareholders v02 Building A Strong Growth Company Conduit Update * All data as of quarter-end KEY METRICS* Insurer Related Credit Related Insurer Related Credit Related $28.3B $28.8B $29.2B $28.8B $26.2B Total Conduit Assets Outstanding $292M $2M $730M $128M $271M State Street Balance Shee
Slide 32: Annual Shareholders v02
31 Annual Shareholders v02
Slide 33: Capital Structure: Capital Ratio Targets
32 Annual Shareholders v02 Building a Strong Growth Company > Stated targets for State Street Corporation > 2008 targets – Maintain flexibility in challenging environment – Tier-1 Leverage — at or above top end of range (~6.00%) – TCE — at or around lower end of range (~4.25%) Capital Structure 4.25
Slide 34: Capital Ratios for State Street Corporation
33 Annual Shareholders v02 > We expect to rebuild TCE by 40-50 basis points/quarter (net of dividend) > We do not intend to repurchase stock over the near–term > We are monitoring our capital position closely Building a Strong Growth Company 2.92% 13.79% 12.41% 6.09% 3/31/08 Actual N/A TCE 10.00% To
Slide 35: Annual Shareholders v02
34 Annual Shareholders v02
Slide 36: Outlook for Net Interest Revenue and Net Interest Margin
35 Annual Shareholders v02 Building a Strong Growth Company > Prepared for possibility of continuing market uncertainty > Comfortable with position of investment portfolio and conduits > Remain conservative and build capital > Our 2008 outlook: Outlook for Net Interest Revenue and Net Interest Margi
Slide 37: Assumptions
36 Annual Shareholders v02 Building a Strong Growth Company > Balance sheet size to be about the same as Q4 2007 average > Favorable mix of liabilities continues > Yield curve remains positively shaped > Credit spreads to narrow as markets stabilize > Moderation in growth of non-US transaction depos
Slide 38: Risks and Opportunities
37 Annual Shareholders v02 Building a Strong Growth Company > Risks – Deposit flow declines significantly – US interest rates increase by 50–100 BPS in a quarter – Non-US rates decline ahead of forecast > Opportunities – Transaction deposits grow faster than forecast – Non-US rates remain stable or
Slide 39: 2008 Future Expectations
38 Annual Shareholders v02 Building a Strong Growth Company > Balance Sheet – Size of balance sheet to be about the same as the 4Q 2007 average – Duration gap of 2 to 4 months appropriate – Liquidity managed downward when market conditions improve – Rate of growth of non-US deposits to moderate and
Slide 40: [LOGO]
[LOGO]
Slide 41: Performance Q1 2008
40 Annual Shareholders v02 14%–17% 10%–15% 14%–17% 2008 Goals % Change 3/31/07 3/31/08 For the Three Months Ended +810 BPS OPERATING LEVERAGE +49.5% $0.93 $1.39 Operating earnings per share 17.4% 19.4% Operating return on equity +44.1% 1,213 1,748 Operating expenses +52.2% $1,708 $2,600 Operating re
Slide 42: Expanding Globally in 2008
41 Annual Shareholders v02 > Established presence in Krakow, Poland and Beijing, China > In Q1 added $600B in assets to be serviced – 67% from US – 33% from non-US locations > In Q1 added $69B in new business at SSgA – 34% from US – 66% from non-US locations Building a Strong Growth Company Continui
Slide 43: Investor Financial Update
42 Annual Shareholders v02 Building a Strong Growth Company $ in millions, except per share $26 million $0.00 $190 million* 91% Progress as of 3/31/08 Progress as of 12/31/07 Target 2/05/07 $198 million $250–$270 million Merger and Integration Costs $(0.06) $0.00+ Operating EPS accretion/(dilution)
Slide 44: Competitive Analysis (Q1 2008 vs. Q1 2007)
43 Annual Shareholders v02 24.9% 31.1% 38.6% 49.5% State Street (ex IFIN) 33.6% 16.3% 18.7% 22.6% Northern Trust 12.3% 9.2% 16.0% 16.1% The Bank of New York Mellon** 19.4% 44.1% 52.2% 49.5% State Street ROE Expense Growth Revenue Growth EPS Growth* Company* Building a Strong Growth Company *EPS grow
Slide 45: Continuing the Momentum
44 Annual Shareholders v02 Building a Strong Growth Company > Delivered corporate-record Q1 revenue and operating earnings per share > Core business continues to be strong – Investment servicing adding significant new customers – SSgA moving ahead > Current size of unrealized losses in investment po
Slide 46: State Street
STATE STREET.
Slide 47: Appendix
46 Annual Shareholders v02 Building A Strong Growth Company > APPENDIX A – Investment portfolio – Conduit Update > APPENDIX B – Reconciliation of GAAP to Operating Results
Slide 48: Annual Shareholders v02
47 Annual Shareholders v02
Slide 49: Unrealized Gain/(Loss) by Asset Type
48 Annual Shareholders v02 Building a Strong Growth Company Investment Portfolio (as of 3/31/08) UNREALIZED GAIN/(LOSS) BY ASSET TYPE 1,911 (364) 32.4 24.4 — — — 100% Mortgage-backed securities 9,166 (1,940) 100.0 75.4 2.2% 3.5% 7.6% 86.7% TOTAL PORTFOLIO 552 (134) 7.8 5.9 9% 1% 30% 60% Clipper tax-
Slide 50: Unrealized Gain/(Loss) in Asset-Backed Securities
49 Annual Shareholders v02 Building a Strong Growth Company 28 (62) 2.9 0.8 7% — 6% 87% Other 36 (81) 5.2 1.4 — — 2% 98% CLOs 164 (449) 35.3 9.6 — 1% 9% 90% Student loans 82 (125) 13.6 3.7 4% 12% 4% 80% Credit cards AAA BBB A AA 1% 21% — — — 3% — — 2% 14% 12% — 30% 6% 13% 265 (574) 21.7 5.9 70% Sub-
Slide 51: ABS Collateralized by Sub-Prime First-Lien Mortgages
50 Annual Shareholders v02 Building a Strong Growth Company $0 $9M $0 — — — — Q1 Asset Value 0 3 0 $(574)M 41.4% 70% AAA 30% AA $5.9B Q1 ’08 3 0 0 0 Credit watch 0 0 0 0 Defaults 0 0 0 0 Downgrades $(314)M $(149)M $2M $(1)M Unrealized MTM after-tax gain/(loss) 39.8% 37.6% 35.8% 33.5% Credit enhancem
Slide 52: Stress Coverage: Asset-Backed Securities
51 Annual Shareholders v02 Building a Strong Growth Company SFL: 1.1% (worst historic loss experience- UK 1989) Coverage: 9.9x HCL: 0.3% Avg. CE: 10.9% Foreign RMBS: $4.6B SFL: 7.5% (worst single month annualized-November 2005) Coverage: 2.7x HCL: 4.8% (= wgtd. avg. charge-offs) Avg. CE: 20.0% Credi
Slide 53: Unrealized Gains/(Losses) in Mortgage-Backed Securities
52 Annual Shareholders v02 Building a Strong Growth Company Investment Portfolio (as of 3/31/08) UNREALIZED GAINS/(LOSSES) IN MORTGAGE-BACKED SECURITIES AAA AA .5% — — 28.7 4.3 9.0 15.4 Book Value ($B) 100% 99.5% 100% 100% Ratings 2,054 (457) 100.0 TOTAL MBS 143 (93) 15.0 CMBS 307 (425) 31.4 Non-Age
Slide 54: Stress Coverage: Mortgage-Backed Securities Portfolio
53 Annual Shareholders v02 Building a Strong Growth Company SFL: 4.6% (2X S&P Alt-A curve) Coverage: 2.5X HCL: 0.10% Avg. CE: 11.6% Alt-A: $1.2B SFL: 4.4% (1999 Snyderman Study long-term avg.) Coverage: 5.4X SFL: 1.2% (20X the HCL) Coverage: 7.3X No losses expected HCL: 0.17% Avg. CE: 24.0% CMBS: $4
Slide 55: Annual Shareholders v02
54 Annual Shareholders v02
Slide 56: Unrealized Gain/(Loss) in the Conduit Assets
55 Annual Shareholders v02 Building a Strong Growth Company *Includes Trade Receivables, CLOs, Business/Commercial loans and other instruments. No individual asset class represents more than 2% of total portfolio, except Trade Receivables at 3% Conduit Update (as of 3/31/08) UNREALIZED GAIN/(LOSS) I
Slide 57: Unrealized Gain/(Loss) in ABS in the Conduit
56 Annual Shareholders v02 Building a Strong Growth Company Conduit Update (as of 3/31/08) UNREALIZED GAIN/(LOSS) IN THE ASSET-BACKED SECURITIES IN THE CONDUIT ASSETS 21% 1% 3% 52% Not Rated 2 0 2 0 Downgrades AAA BBB A AA 10% — 37% 4% 18% 3% 46% 15% 12% 22% 6% 6% 7,879 3,014 1,878 2,987 Book Value
Slide 58: Stress Coverage: ABS in the Conduit Assets
57 Annual Shareholders v02 Building a Growth Company Conduit Update (as of 3/31/08) STRESS COVERAGE: ASSET-BACKED SECURITIES IN THE CONDUIT ASSETS HCL = historic cumulative loss; Avg. CE = average credit enhancement; SFL = STT’s stressed future losses; Coverage = CE/SFL SFL: 12.0% (historic default
Slide 59: Unrealized Gain/(Loss) in MBS in the Conduit
58 Annual Shareholders v02 Building a Strong Growth Company Conduit Update (as of 3/31/08) UNREALIZED GAIN/(LOSS) IN THE MORTGAGE-BACKED SECURITIES IN THE CONDUIT ASSETS 22 0 22 0 0 Downgrades AAA BBB A AA 6% 33% 7% — — 10% 29% 12% 6% 2% 23% 17% — 9% 59% 15,456 2,091 3,979 4,684 4,702 Book Value ($M
Slide 60: Stress Coverage: MBS in Conduit Assets
59 Annual Shareholders v02 Building a Growth Company Conduit Update (as of 3/31/08) STRESS COVERAGE: MORTGAGE-BACKED SECURITIES IN CONDUIT ASSETS SFL: 1.5% (2x stress CDR; 5 year WAL; 50% LGD) Coverage 5.1x SFL: 1.5% (2x stress CDR; 5 year WAL; 50% LGD) Coverage: 3.7x SFL: 1.4% (stress of 2x industr
Slide 61: Reconciliation of Reported Results to Operating-Basis Results
60 Annual Shareholders v02 STATE STREET CORPORATION RECONCILIATION OF REPORTED RESULTS TO OPERATING-BASIS RESULTS State Street presents supplemental financial information on an “operating” basis in order to provide financial information that is comparable from period to period, and to present compar
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