State Street Corp provides a range of investment management strategies, investment management advisory services and other financial services for corporations, public funds and other sophisticated investors.
Finalizing the criteria on the eight largest banks' leverage ratios - a minimum 5% at the holding company level and 6% at the bank subsidiary level - U.S. regulators impose a far tougher standard than international norms of 3%.
The regulators at work were the Fed, the FDIC, and the OCC, and the Fed's Dan Tarullo indicates he wants to go further, signaling the central bank may boost the risk-based capital surcharge to a higher level than the international standard. The most to lose in this scenario would be investment banks like Goldman and Morgan Stanley who don't have the deposit bases of their retail brethren.
Banks have until January 1, 2018 to comply with the new rule.
Regulators are due to vote today on whether to increase the "leverage ratio" for the eight largest U.S. banks to 5-6% of their total assets. The Basel III standard is 3%.
The move would force banks to add tens of billions of dollars in loss-absorbing capital, although many firms have already been bulking up in anticipation of the rule change.
Meanwhile, the Fed has given banks two extra years - until July 2017 - to ensure that their collateralized loan obligations (CLO) comply with the Volcker rule's restrictions on speculative investments. The extension is a reaction banks' fears that selling their CLOs would lead to substantial losses.
Vanguard - the third-largest provider of ETFs - pulled in $12.6B, or more than 90% of all the money gathered by U.S. ETFs in Q1, according to data put together by Bloomberg. Number 2 State Street (STT) saw outflows of $17B during the quarter, led by $17.7B pulled from its massive SPDR S&P too ETF Trust.
Top-ranked BlackRock (BLK) brought in $2.7B, bringing total assets to $668B. It's largest ETF - the iShares MSCI EAFE ETF - gathered $828M to bring its total AUM to $53.6M.
Vanguard's angle is a focus on retail investors while BlackRock and State Street are more popular with hedge fund types who like to trade in and out a bit more. Over the last two years, Vanguard's AUM have grown 68% vs. 33% for BlackRock and 27% for State Street.
Absent reforms, another financial crisis is likely to leave taxpayers on the hook for hundreds of billions, warns the IMF, estimating the world's biggest banks receive up to $590B in implicit public subsidies because of their TBTF status.
Said subsidies include bankers who still have a "heads I win, tails you lose" attitude, and investors who lend at lower cost to banks than they might otherwise. The IMF calculated the size of the subsidies by comparing the CDS prices and credit ratings across larger and smaller banks. While the amount has fallen since the crisis, it still remains sizable. "All in all ... the expected probability that systemically important banks will be bailed out remains high in all regions."
Subsidies for the biggest players are "like insurance for which banks don't need to pay a premium," says senior IMF analyst Gaston Gelos.
The Federal Reserve is due to say today whether it approves banks' plans to pay dividends and/or repurchase stock. The process is spread out over a week so that banks can alter their programs if they don't receive Fed authorization.
Last year, the Fed told JPMorgan (JPM) and Goldman Sachs (GS) to change their capital-allocation plans.
The Fed's decision will come a week after it said that 29 out of 30 banks had passed its stress tests.
With the Fed limiting bank dividends to about 30% of earnings, the real action is in buybacks, so look for lenders to announce some loud repurchase plans this week following the results of the Fed's CCAR (due after the bell on Wed.). Big numbers are nice, but more important is the size relative to the share count.
According to KBW, only Discover (DFS +0.2%) and State Street (STT -0.5%) had large enough programs in 2012 and 2013 to lower their float by more than 5%. Analyst Sanjay Sakhrani estimates Discover will get approval for its $1.6B buyback this year, which would be a boost to last year's repurchases.
Analyst Robert Lee sees State Street getting approval for $2.026B in buybacks, with estimated net buybacks of $1.62B down from $1.676B a year ago.
More on Zions (ZION): The failure likely has something to do with CDOs on its books backed by trust-preferred securities. The bank signaled earlier this year it would likely resubmit its capital plan to the Fed as the test's calculation of its capital ratio wouldn't reflect Zion's planned sale of these.
The Fed is due to release the results of its annual stress test on 30 banks today, with most expected to pass.
If the banks, which include JPMorgan (JPM), Citigroup (C) and Morgan Stanley (MS), are found wanting, they will have a few days to alter any plans to return money to shareholders - the Fed is due to say next week whether it will approve firms' dividend and/or stock-buyback programs.
A paired upgrade/downgrade at UBS has the team boosting Bank of New York Mellon (BK) to Buy, citing earnings leverage to rising rates and low Street expectations, and downgrading State Street (STT) to Hold citing secular pressure on fee income and high Street expectations.
Amid a stock market continuing to set new high's State Street's (STT) SPDR S&P 500 ETF (SPY) has already seen $18B in outflows YTD, surpassing the $16B pulled out of the $159B fund in all of 2013. Does the divergence signal a disconnect between market highs and sentiment, or - as the bull market ages - are money managers becoming more focused on picking specific sectors and stocks.
Maybe more of a trader's ETF, SPY net flows tend to be more volatile than those of Vanguard's S&P 500 ETF (VOO) which is nearly identical in size. The VOO has seen inflows of $1.3B this year.
With Wall Street dealer banks - under pressure on the capital and risk-taking fronts - pulling back from their traditional role as middlemen in corporate bond trades, State Street (STT) (and rival BK soon) is stepping into the $9.6T market.
Wall Street banks' bondholdings are off more than 70% from their peak in 2007, according to Fed data, raising worry bond investors might find themselves stuck with paper they need to sell in times of market stress, and large investors like AllianceBernstein, BlackRock, and Fidelity have been pushing for new avenues to buy and sell.
One advantage the trust banks have is that they don't have trading desks of their own, and investors can worry less about their interests leaking out. "Global custodians are in the natural position to have this service," says Eaton Vance's Michael O'Brien.
Expecting dividends to grow 49% on average for the banks subject to the Fed's stress tests (about the same as last year), Markit, says Citigroup (C) and Bank of America (BAC) will lead the way with 400% boosts. "They are the last of the major banks paying minimal dividends ... change is overdue."
While 400% is a big number, Citi and BofA will continue to lag their peers in terms of yield (400% growth on a penny just leads to a nickel).
Also expected to have a significant pop is Morgan Stanley (MS) - a doubling of the payout to $0.10 per share and a 1.4% yield. Others in the top 5 in increases are Zions Bancorp (ZION) with a 75% boost to $0.07 and Regions Financial (RF) up 67% to $0.05.
The others: KEY +27%, HBAN +20%, BK +20%, STI +20%, COF +17%, DFS +15%, AXP +13%, STT +12%, JPM +11%, CMA +11%, PNC +9%, USB +9%, GS +9%, FITB +8%, WFC +7%, NTRS +6%, and no soup for BBT and MTB where the dividends are expected to be flat at $0.23 and $0.70 per share, respectively.
As for ETFs, the dividend jumps are expected to have the biggest impact on the XLF which would see a 25% increase in payout: The ETF has 81 companies, but the top 5 holdings - BofA, Wells, JPM, Citi, USB - make up 41% of assets. In contrast, just two CCAR banks make up the top five holdings of the KBE and it should see a more muted increase of just 18%.
The latest move by an ETF operator to address inefficient trading seen as holding back growth in Europe's fragmented ETF market, State Street (STT +0.1%) launches FundConnect, enabling large institutional clients to trade multiple products via electronic platform rather than faxes and phone calls.
“Developments like FundConnect that help support liquidity providers across Europe will play an important role in enabling the ETF industry to grow,” says Alexis Marinof, State Street's head of SPDR ETF for EMEA. Available in the U.S. since 2008, FundConnect has been adapted to deal with the complexities of the European ETF market.
One European market maker notes iShares already has an online ETF platform, so this effort by State Street is welcomed and will make him/her a more active user.
The U.K.'s Financial Services Authority fines State Street (STT) $38M for deliberately overcharging six clients $20.2M in 2010 and 2011, and acting with "complete disregard:" for the interests of its customers.
The FCA said State Street had developed and executed a deliberate strategy to charge substantial mark-ups on agreed fees, and the scheme only came to light after one client discovered it.
State Street: "(The employee) behavior was unacceptable and a significant departure from the high standards of conduct and transparency that we expect and certainly not consistent with the manner in which our employees act on behalf of clients every day."
State Street got a 30% discount on the fine for settling early.