Overall, STT's return on equity (ROE) in 2Q'14 was 11.9%, which was up from the 7.3% ROE in the sequential quarter and 11.3% in the year-ago quarter. While Fitch views STT's earnings as satisfactory from a credit perspective and also views the moderate improvement positively, it also notes that STT's results remain below the company's long-term averages. Fitch believes this level of earnings performance is likely to persist until either short-term interest rates increase (whenever that may be) or foreign exchange volatility increases.
STT's core asset servicing and management franchise performed well during the quarter as asset servicing fees increased 4.0% from the sequential quarter and 7.2% from the year-ago quarter. Similarly, asset management also performed well with management fees up 2.7% from the sequential quarter and a solid 8.3% from the year-ago quarter. These improvements reflected
As previously noted, growth in market-based revenue for STT - as well as the rest of the industry - continued to be constrained. During the quarter, securities finance revenue seasonally expanded while foreign exchange (FX) revenue continued to decline. FX revenue declined amid continued low global FX volatility despite improved volumes.
Net Interest Revenue (NIR) modestly expanded relative to the sequential quarter largely due to growth in the balance sheet amid strong deposit inflows, but declined relative to the year-ago quarter. The company's net interest margin (NIM) also declined to 1.12% in 2Q'14 reflective of continued pressure on investment yields. That said, Fitch continues to expect STT to be very sensitive to higher short-term interest rates whenever they eventually rise.
Expense management remains a key focus for STT, as management continues to optimize its cost base amid the challenging interest rate environment and higher regulatory costs. Expenses benefited relative to the sequential quarter on lower deferred compensation costs, but rose faster than revenue relative to the year-ago quarter.
Despite management's continued good execution on its Business Operations and Technology Transformation program, higher regulatory and compliance costs continue to offset some of the savings the program has achieved. As a result, STT now expects it will be more challenging to achieve its goal of positive annual operating leverage in 2014, without a pick-up in the company's market-based revenue.
Fitch continues to consider STT's liquidity position to be sound. The company's capital ratios are good as well, particularly considering the risk profile of its balance sheet. STT's estimated Common Equity Tier 1 (CET1) ratio under the Basel III transitionally phased-in standardized approach was good at 11.3%. Additionally, STT's supplementary leverage ratio (SLR) was 6.1% at the holding company and 5.8% at the main bank subsidiary,
Additional information is available at 'www.fitchratings.com'
Source: Fitch Ratings
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