Fitch Ratings has affirmed the Long-Term (LT)and Short-Term (ST) Issuer Default Ratings (IDRs) of
The IDRs for its operating subsidiary,
Key Rating Drivers
VR Underpins IDR: STT's IDR is driven by its Viability Rating (VR) of 'aa-', which reflects a strong franchise, conservatively managed balance sheet and healthy liquidity. These attributes are offset by Fitch Ratings' assessment of State Street's weaker earnings and profitability, and capital and leverage, relative to similarly rated banks. The Outlook is Stable, as Fitch expects STT's credit fundamentals to remain in line with its current ratings despite our expectations for a weaker economy in 2024.
Franchise Strength Supports Ratings: The ratings continue to be supported by a leading franchise in global trust and custody, and a competitive position in asset management - stemming from its SPDR exchange-traded fund (ETF) family and other passive investment products. Investments in Alpha, STT's integrated front-to-back office platform, have the potential to drive margin expansion and create a moat around a highly competitive business. STT continues to boost scale and breadth of product offerings in businesses with high barriers to entry, resulting in resilient client relationships.
Strong Risk Management: Fitch considers STT's balance sheet to be conservatively managed. The company has an extraordinarily liquid balance sheet and the lowest loan-to-deposit ratio among trust banks. Fitch believes the company has firm oversight for its major risk categories, including operational risk. Cyber risk is an outsized risk factor for the bank, given STT's significant role in providing market infrastructure.
Low Credit Footprint: Fitch considers STT's loan book to be of high quality, with exposures primarily to financial counterparties with strong collateral. Notably, the bank has the smallest loan book (relative to total assets) among Fitch-rated
Declining Operating Profit: Operating profit in financial year 2023 (FY23, to
STT expects to achieve positive fee operating leverage for 2024, driven by 3%-4% in expected fee revenue growth - assuming supportive equity market levels. Fitch considers
Capital Distribution Expected: STT's common equity Tier 1 (CET1) level of 11.6% at 4Q23 remains above its long-term CET1 target of 10%-11%. It announced a
Liquidity and Funding Profile a Key Rating Strength: Fitch considers STT to have strong access to global markets and contingent funding sources. We also view the low risk and highly liquid balance sheet as a key rating strength, with over 48% of its assets invested in cash and high-quality available-for-sale (AFS) securities as of 4Q23. The rating reflects a durable deposit franchise which is countercyclical to equity markets and 77% operational, the highest in the peer group. Notably, STT's loan-to-deposit ratio of 16.5% is among the lowest among Fitch-rated banks globally.
Fitch believes the company has ample capacity to withstand greater deposit pressures from quantitative tightening and a higher-for-longer interest-rate environment, but the Funding and Liquidity factor score has limited headroom at the 'aa' level as it is higher than the banking sector's 'aa-' Operating Environment.
Holding Company Notching: The firm's intermediate funding entity (IFE),
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Evidence of outsized deterioration in the level and volatility of earnings could lead to negative rating action. Should the bank's level of annualized operating profit to risk-weighted assets (RWA) fall below 1.5% for several quarters, Fitch may revise the Rating Outlook on the LT IDRs to Negative or downgrade the VR and LT IDRs.
STT's ratings would be at risk if its CET1 ratio were to approach or ultimately dip below 10% for several quarters in the absence of a credible plan for recovery in the CET1 ratio to above 10%. Fitch also expects STT to maintain other capital measures, namely the Tier 1 leverage ratio, above regulatory or 'well-capitalized' minimums. Any capital level below a regulatory minimum at either the holding company or operating company level could lead to a negative rating action.
Fitch believes the main threat to STT's business model and ratings would result from a large, idiosyncratic technological/cyber, counterparty, or operational loss leading to reputational damage that causes clients to withdraw assets from the bank. Fitch believes these risks have been well monitored and controlled, but also acknowledges they are inherently difficult to predict and quantify.
A large occurrence that causes a revenue loss of 5% or greater would likely prompt Fitch to consider taking negative rating action. Although not expected, should specific protections within STT's legal structure not hold up and not allow for uninterrupted liquidity availability from the IFE under business as usual, the holding company's VR and IDRs could be notched down accordingly.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
STT's ratings are already near the top of Fitch's global rated bank universe. As a result, we believe there is limited potential for upward rating momentum.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Government Support Rating (GSR): STT's GSR of 'ns' reflects Fitch's view that senior creditors can not rely on receiving full extraordinary support from the sovereign in the event that STT becomes non-viable. In Fitch's view, implementation of the
Senior Debt Ratings: STT's senior debt ratings are aligned with the firm's IDRs, as a default on these obligations equates to a default of the holding company.
Government Support Rating (GSR): In Fitch's view, STT's Government Support Rating would be sensitive to any change in
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Long-Term and Short-Term Deposit Ratings: The long-term and short-term deposit ratings for SSBT are sensitive to any change to STT's Long-Term and Short-Term IDRs.
Senior Debt Ratings: Senior debt ratings are sensitive to any change in STT's IDRs
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
SSBT's LT IDR is one notch above its VR, reflecting the implementation of TLAC requirements for
Long-Term and Short-Term Deposit Ratings: SSBT's domestic (uninsured) deposit ratings are one notch higher than its LT IDR, reflecting uninsured depositors' superior recovery prospects in an event of default - given depositor preference in the
Derivative Counterparty Rating (DCR): SSBT's Derivative Counterparty Rating (DCR) is at the same level as its Long-Term IDRs - given the lack of preferential status over other senior obligations in a resolution scenario; therefore, the DCR will move in line with the IDR.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
SSBT's VR would be sensitive to the intrinsic creditworthiness of the group as a whole.
DCR: The DCR is primarily sensitive to a change in SSBT's Long-Term IDR. In addition, it could be upgraded one notch above the IDR if a change in legislation creates legal preference for derivatives over certain other senior obligations and, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario.
Deposit Ratings: Deposit ratings are sensitive to any change in SSBT's IDRs.
VR ADJUSTMENTS
A Business Profile score of 'aa-' has been assigned above the implied score of 'a' due to the following adjustment reason: Market Position (positive).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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