Leveraging for expansion
State Street’s (STT) leverage has remained at similar levels over the past few quarters. The company’s long-term debt-to-equity ratio has been in the range of 0.50x–0.60x.
As of 4Q16, State Street reported total assets of $243 billion, which was 1% lower than $245 billion in 4Q15. The decline was attributed to a decline in interest-bearing deposits, total investment securities, partially offset by new ETF flows. Shareholder equity rose to $21.2 billion compared to $21.1 billion in 4Q15.
State Street saw higher expenses, lower revenues, and lower taxes in 4Q16. The company posted an operating margin of 20.8% in 2016 compared to its peers, who reported the following operating margins in 2015:
Together, these companies form 1.9% of the SPDR S&P 500 ETF (SPY).
Balance sheet strength
State Street’s common equity Tier 1 ratios in 4Q16 under both the Basel III fully phased advanced and standardized approaches were 11.7% and 11.6%, respectively. That’s lower than the previous quarter, mainly due to higher risk-weighted assets.
The supplementary leverage ratio of State Street Bank was about 6.1% on a fully phased-in basis. On a fully phased-in basis, the company’s estimated pro forma Basel III common equity Tier 1 ratios as of December 31, 2016, were both 10.9%. They were calculated under the advanced and standardized approaches.
State Street’s long-term debt has fallen 3.4% to $11.4 billion in 4Q16 from $11.8 billion in 3Q16. Its long-term debt-to-equity ratio rose to 53.9% compared to 53.3% in 3Q16. State Street is deploying resources for restructuring and expansion, funded partially by long-term debt.
In the next part of the series, we’ll study State Street’s dividends and repurchases in 4Q16.