State Street Corporation · NYSE:STT
State Street — Investor Day (February 2008)
50 slides from State Street's investor day presentation, Feb 5, 2008
Slide 1: Building a Strong Growth Company, Continuing the Momentum
BUILDING A STRONG GROWTH COMPANY CONTINUING THE MOMENTUM STATE STREET Investor and Analyst Forum February 5, 2008
Slide 2: Ronald E. Logue, Chairman and Chief Executive Officer
Ronald E. Logue Chairman and Chief Executive Officer
Slide 3: Agenda
1 Building a Strong Growth Company Achieving 2007 Goals Growing Faster Globally Reviewing Financials Setting 2008 Goals Agenda
Slide 4: Forward-looking statements
2 This presentation contains forward-looking statements as defined by United States securities laws, including statements our financial goals and expectations, strategic objectives, financial and industry outlook and business environment, as well as about integration, cost savings and other results
Slide 5: Achieving 2007 Goals
ACHIEVING 2007 GOALS
Slide 6: Achieving 2007 Goals
4 Building a Strong Growth Company Achieving 2007 Goals 5-yr. CAGR = 17.5% 5-yr. CAGR = 17.3% $ % $ in billions 0 3 6 9 Revenue 0 2 4 6 8 10 12 14 16 18 ROE 0.00 1.00 2.00 3.00 4.00 5.00 EPS 2002 2003 2004 2005 2006 2007 Information reflects operating-basis financial information; refer to the descri
Slide 7: Key Tactics: Grow non-US revenue
5 Building a Strong Growth Company 41% 43% 39% 24% 30% 37% 20 25 30 35 40 45 2002 2003 2004 2005 2006 2007 *Pro Forma to reflect the acquisition of Investors Financial = 39% Achieving 2007 Goals – Key Tactics > Grow non-US revenue to be 50% of total company % Deutsche Effect IFIN Effect *Proforma 39
Slide 8: Key Tactics: Generate positive operating leverage
6 137 5 -257 108 290 510 -300 0 300 600 2002 2003 2004 2005 2006 2007 Building a Strong Growth Company Achieving 2007 Goals – Key Tactics > Generate positive operating leverage on an annual basis Information reflects operating-basis financial information; refer to the description and reconciliation
Slide 9: Key Tactics: Actively manage the balance sheet
7 Building a Strong Growth Company Achieving 2007 Goals – Key Tactics 171 125 108 108 117 142 75 100 125 150 175 200 2002 2003 2004 2005 2006 2007 Net interest margin* > Actively manage the balance sheet BPS *Net interest margin presented on a fully tax-equivalent basis.
Slide 10: Key Tactics: Make SSgA a larger part of State Street
8 Building a Strong Growth Company Achieving 2007 Goals – Key Tactics 12% 19% 26% 31% 35% 36% 21.6% 24.1% 21.3% 16.9% 10% 4.2% 0 10 20 30 40 2002 2003 2004 2005 2006 2007* SSgA’s pre-tax margin SSgA as percent of total pre-tax income of company > Make SSgA a larger part of State Street *2007 informa
Slide 11: Key Tactics: Invest in new product development
9 Building a Strong Growth Company Achieving 2007 Goals – Key Tactics 130/30 Investment Strategies Pension Defeasance Servicing OTC Derivatives Servicing Private Equity > Market projected to grow to $1 trillion within 5 years* > SSgA is the recognized market leader with $12.8 billion under managemen
Slide 12: Investors Financial Update
10 Building a Strong Growth Company $ in millions, except per share Achieving 2007 Goals – Investors Financial Update Progress as of 12/31/07 Target 2/05/07 $198 million $250–$270 million Merger and Integration Costs $(.06) $(.14) Operating EPS dilution (2007) $170 million* $345–$365 million Cost Sa
Slide 13: Competitive Analysis (2007 vs. 2006)
11 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 growth based on First Call a
Slide 14: Growing Faster Globally
GROWING FASTER GLOBALLY
Slide 15: Growing Faster Globally
13 26% 11% 4% $2.213B $.906B $.301B 9% 7% 8% $.412B $.282B $.371B – Europe – Asia Pacific – Other North America 24% 24% % Non-US 35% 41% % Non-US 12/31/07 12/31/02 Twelve months ended 4,546 $1.065B 9,506 Non-US Employees/ Employees $3.420B Non-US Revenue Building a Strong Growth Company Growing Fast
Slide 16: Percentage of revenue that is non-US
14 Building a Strong Growth Company Source: Merrill Lynch, October, 2007, except STT reports in 2007 and 2008 and BK in 1/17/08 press release *Pro forma following Investors Financial acquisition = 39% Percentage of revenue that is non-US 31% N/A 41% 2007 51% 40% 40% STT 43%* 39% 37% STT By net incom
Slide 17: Growing Faster Globally: Asia-Pacific Region
15 11% 28% 22% 10% 3% 9% 14% 3% Sources: Allianz Global Investors, Asian Investor Magazine, Bank Negara Malaysia, Bank of Korea, Central Bank of the Republic of China (Taiwan), Central Provident Fund Board, Cerulli Associates, CIA World Fact Book, Employees Provident Fund (EPF) of Malaysia, Governme
Slide 18: Asia-Pacific market growth and State Street revenue growth
16 COLLECTIVE, PENSION AND GOVERNMENT MARKET GROWTH 2003–2007 CAGR: 16% STATE STREET REVENUE GROWTH 2003–2007 CAGR: 29% Building a Strong Growth Company Growing Faster Globally: Asia-Pacific Region $8.2T 2003 $328M 2003 $14.8T 2007 $906M 2007
Slide 19: Growing Faster Globally: Europe
17 Sources: Cerulli, Allianz, DWS, CEA, and State Street estimates. Luxembourg assets exclude German, Swedish and Swiss offshore assets which are reflected in the total for the respectiv e country. Building a Strong Growth Company Growing Faster Globally: Europe COLLECTIVE, PENSION AND INSURANCE MAR
Slide 20: Europe market growth and State Street revenue growth
18 Building a Strong Growth Company STATE STREET REVENUE GROWTH 2003–2007 4-YEAR CAGR: 28% $14.5T 2003 $827M 2003 $21.5T 2007 $2.213B 2007 Growing Faster Globally: Europe COLLECTIVE, PENSION AND INSURANCE MARKET GROWTH 2003–2007 4-YEAR CAGR: 10%
Slide 21: SSgA Geographic Distribution of Assets 2002 vs. 2007
19 $1,389 70% $427 22% $163 8% Building a Strong Growth Company $50 7% $76 10% $637 83% North America Europe/UK Asia/Pac 2002 2007 Distribution is determined by location where assets are being managed. $763 billion $1.979 trillion Growing Faster Globally: SSgA GEOGRAPHIC DISTRIBUTION OF ASSETS 2002
Slide 22: Edward J. Resch, Chief Financial Officer
Edward J. Resch Chief Financial Officer
Slide 23: Reviewing Financials
REVIEWING FINANCIALS
Slide 24: Agenda
22 Building a Strong Growth Company Agenda Balance Sheet Conduit Update Capital Structure Outlook for Net Interest Revenue and Net Interest Margin
Slide 25: Balance Sheet
BALANCE SHEET
Slide 26: Management Philosophy
24 Building a Strong Growth Company > Centralized treasury function in 2005 – Added significant talent – Invested in highly rated asset-backed securities and mortgage-backed securities to replace some of our treasuries, agencies and bank placements > Operating principles – Maintain high credit quali
Slide 27: Assets (Period End)
25 Building a Strong Growth Company Balance Sheet ASSETS (PERIOD END) Liquidity Investment Portfolio Loans All Other $41.7 44% $37.6 40% $4.6 5% $10.1 11% $15.8 11% $17.6 12% $34.5 24% $74.6 53% $94.0 billion $142.5 billion 12/31/04 12/31/07
Slide 28: Assets: Investment Portfolio
26 Asset-backed securities Mortgage-backed securities Commercial mortgage-backed securities $26 billion $39 billion $10 billion Corporate bonds Municipals Treasuries Agency debentures Agency mortgages Small Business Administration loans Building a Strong Growth Company Balance Sheet ASSETS: INVESTME
Slide 29: Investment Portfolio Detail
27 Building a Strong Growth Company > 95% AAA / AA rated > Constructed to perform well through periods of economic weakness > Unrealized pre-tax AFS MTM = $(1.2)B at 12/31/07 > Assets selected using rigorous credit process > Performing as expected > Diversified by asset class and geography > Minimal
Slide 30: Asset-Backed Securities Collateralized by Sub-Prime Mortgages
28 Building a Strong Growth Company Balance Sheet > Assets selected using a rigorous, independent credit process – First-lien mortgage pools – Performing within range of expectations > Well diversified by issue, geography and servicer > Seasoned portfolio: nearly half of our holdings were issued 200
Slide 31: Sub-Prime ABS (End of Period)
29 Building a Strong Growth Company 3 0 0 0 Credit watch 0 0 0 0 Defaults 0 0 0 0 Downgrades $(511)M $(242)M $3M $(2)M Unrealized MTM gain/(loss)— pre-tax 39.8% 37.6% 35.8% 33.5% Credit enhancement 71% AAA 29% AA 73% AAA 27% AA 75% AAA 25% AA 77% AAA 23% AA Ratings $6.2B $6.6B $7.2B $8.0B Size of po
Slide 32: Investment Portfolio: Monoline Insurance Coverage
30 Building a Strong Growth Company > Philosophy: Assets are purchased based on an independent assessment of their underlying credit quality, not based on the insurance “wrap” provided > As a result, our exposure to “wraps” for protection is secondary and is relatively small > Diversified by monolin
Slide 33: Investment Portfolio: Monoline Insurance Coverage
31 Building a Strong Growth Company 100% 1.0% 1.1% 2.9% 6.5% 88.5% Credit quality 100% 1.6% 1.9% 4.8% 8.5% 83.2% Credit quality unwrapped Total NR BBB A AA AAA As of 12/31/07 INVESTMENT PORTFOLIO—MONOLINE INSURANCE COVERAGE Balance Sheet 91.7% Credit quality unwrapped 95.0% Credit quality AAA & AA C
Slide 34: Conduit Update
CONDUIT UPDATE
Slide 35: Characteristics of Conduits as of 12/31/07
33 Building a Strong Growth Company Conduit Update CHARACTERISTICS OF CONDUITS AS OF 12/31/07 > Business established in 1992 > State Street sponsors 4 conduits, totaling $28.8B (as of 12/31/07) – US (1) = $11.5B; rated A1/P1 – US/European (1) = $11.4B; rated A1/P1 – Australian (2) = $5.9B; one rated
Slide 36: Characteristics of Conduits (at Quarter End)
34 Building a Strong Growth Company > Conduits have $3.5B (12%) of securities that are wrapped by a diverse group of monoline insurers > 27 issues placed on credit watch, representing $758 million (2.6%) of assets; primarily due to wrap providers being put on watch 4 years 4 years 4 years 4 years We
Slide 37: Capital Structure
CAPITAL STRUCTURE
Slide 38: Capital Ratios
36 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 CAPITAL RATIOS 4.25%–4.75% T
Slide 39: Sources and Uses of Capital in 2008
37 Building a Strong Growth Company > Sources – $500M capital security issuance – Net earnings – Equity from employee compensation programs > Uses – Grow regulatory ratios to above target levels and build TCE ratio – Build capital to invest in opportunities for the business – Neutralize share diluti
Slide 40: Capital Ratios: Impact of Issuance
38 Building a Strong Growth Company Pro forma 3.46% 3.49% N/A TCE 13.43% 12.70% 10.00% Total capital ratio 11.95% 11.22% 6.00% Tier-1 capital ratio 5.60% 5.26% N/A Tier-1 leverage ratio $500 APEX Issuance 12/31/07 Well-capitalized > Returns State Street to 9/30/07 levels > Issuance well received by
Slide 41: Outlook for Net Interest Revenue and Net Interest Margin
OUTLOOK FOR NET INTEREST REVENUE AND NET INTEREST MARGIN
Slide 42: Sensitivity
40 Building a Strong Growth Company > Absolute level of rates — US and non-US > Pace of change in rates — US and non-US > Shape of yield curve at short end (0–5 years) RECENT DEVELOPMENTS > Unexpected action by the US Fed > Pace of rate cuts faster than expected > Markets have changed significantly
Slide 43: New Rate Assumptions
41 Building a Strong Growth Company > US – Fed Funds rate cuts to 2.50% during 2008 versus our previous outlook of 4.00% – Yield curve to remain positively sloped in 2008 – Credit spreads to narrow when markets stabilize > Non-US – Euro: ECB cuts 50 bps during 2008 to 3.50%, versus our previous outl
Slide 44: Assumptions
42 Building a Strong Growth Company > Balance sheet size to be about the same as Q4 2007 average > Favorable mix of liabilities continues > Moderation in growth of non-US transaction deposits > Potential compression in non-US deposit spreads with lower rates > Preserve liquidity positioning until ma
Slide 45: View of 2008
43 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 > Revision in our 2008 outlook: Outlook for Net Interest Revenue and Net Interest Margin VIEW OF 20
Slide 46: Summary
SUMMARY
Slide 47: 2008 Future Expectations
45 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 & spreads to compress > Cond
Slide 48: Setting 2008 Goals
SETTING 2008 GOALS
Slide 49: 2008 Goals
47 Building a Strong Growth Company Information reflects operating-basis financial information; refer to the reconciliation provided in the attached appendix. Setting 2008 Goals 2008 Goals Prudent Allocator of Capital A Top-line Revenue Generator A Consistent Earner Expect to achieve in the middle o
Slide 50: Sustaining Momentum in 2008; Appendix: Reconciliation to Operating-Basis Results
48 Building a Strong Growth Company Core Business Cross-sell 120 140 220 240 160 200 180 NIR Sustaining Momentum in 2008 Global Growth km/h New Product Development APPENDIX STATE STREET CORPORATION RECONCILIATION OF REPORTED RESULTS TO OPERATING-BASIS RESULTS State Street presents supplemental finan