Dear Shareholders,
EXECUTING WITH EXCELLENCE, SHAPING THE FUTURE
Looking back on a year of interrelated and cascading pressures, State Street demonstrated the strength and diversification of our franchise and the commitment of our employees in support of our clients. As an essential partner to many of the world’s institutional investors, State Street offers a range of capabilities across the investment life cycle, including investment servicing, investment management, research, and trading. State Street provides its clients with deep industry expertise and global reach, economies of scale, skill, and sophisticated risk management, all of which are built upon a foundation of trust earned from our history of effectively serving partners through all environments.
Our deep experience and history — State Street was founded in 1792 — enable us to be future-facing, innovative, and technology-led across our businesses and functions. State Street has innovated many industry firsts that have played an important role in shaping the future of financial services — from co-creating exchange-traded funds (ETFs) 30 years ago to launching the investment services industry’s first comprehensive front-to-back platform in State Street AlphaSM just a few years ago to today working to tokenize assets.
We also support and enable the global financial system through our engagement with industry participants, policymakers, central banks, and other organizations.
In 2022, State Street once again demonstrated its strength and resiliency — serving its clients and shareholders through market volatility and external macro shocks. The ongoing war in Ukraine, persistent inflation and rising interest rates, supply chain disruptions, tight labor market challenges — these and other pressures placed significant burdens on our clients and investors worldwide. Policymakers have been required to raise interest rates after a long period of near zero rates, with the most aggressive rate hikes coming from the Federal Reserve throughout 2022. Inflation rates have fallen, but nowhere close to the Fed’s 2 percent target. However, other collateral consequences are emerging from this rapid rise in the cost of money. And just days before this report was set to print, Silicon Valley Bank and Signature Bank collapsed as a result of balance sheets impaired by rising rates and extraordinary deposit outflows. First Republic Bank, threatened by the same combination of forces, was supported by a consortium of 11 large banks, including State Street.
These events also suggest that adjusting and responding to inflation after so many years of its absence likely will create new risks for markets and investors. At the same time, the strength and resilience of State Street and other large U.S. banks is reflected in the action taken to support our industry and underscores the importance of being a trusted partner to clients and a steadying force during changing and challenging times. Against this backdrop, State Street’s purpose — to help achieve better outcomes for the world’s investors and the people they serve — has never been more important.
Our strong full-year 2022 results reflect our strategic ambition to be the world’s leading technology-led investment services platform and a winning globally scaled index and systematic investment manager. These results were underpinned by our relentless focus on innovation, the power of our distinctive value proposition, and State Street’s diversified products and services. This strategy continues to resonate with the marketplace, as demonstrated by yet another year of strong client wins.
In 2022, clients entrusted us with $1.9 trillion of total new asset servicing wins, including additional Alpha client mandates and relationship expansions; the Markets and Financing businesses achieved year-over-year revenue growth while continuing to support clients through a changing and volatile environment with a variety of sophisticated markets and financing services; and State Street Global Advisors continued to innovate through the introduction of new products including State Street’s SPDR® Portfolio Low-Cost Suite and Fixed Income solutions. While achieving this growth, State Street also continued to deliver strong expense management and productivity gains. While continuing to innovate and drive forward our ambitious multi-year strategic agenda, our performance was also reflected in 2022 total shareholder return, which exceeded our industry peers and the S&P 500.
FULL-YEAR 2022 FINANCIAL PERFORMANCE HIGHLIGHTS
We achieved solid financial performance in 2022, with net income of $2.8 billion, up 3 percent from 2021. This growth was achieved despite significantly depressed market levels, which directly affect State Street’s fee revenue.
Investment Servicing assets under custody and/or administration (AUC/A) were $36.7 trillion at year-end, a decrease of 16 percent compared to 2021, primarily due to lower market levels. State Street Global Advisors assets under management (AUM) were $3.5 trillion as of December 31, 2022, a decrease of 16 percent compared to December 31, 2021, primarily due to lower market levels. Total revenue for 2022 increased 1 percent compared to last year, despite weaker equity and fixed income market levels during a challenging economic environment, with total fee revenue down 4 percent compared to 2021. Weaker average market levels created fee revenue headwinds for our Investment Servicing and Asset Management businesses in 2022, as servicing and management fees decreased 8 percent and 6 percent year-over-year, respectively. Our Markets and Financing businesses, however, combined with higher interest rates and our deposit strategy, produced materially higher net interest income (NII), which increased 34 percent compared to 2021 from $1.9 billion to $2.5 billion, primarily due to higher interest rates from U.S. and international central bank rate hikes, and our balance sheet strategy.
Foreign Exchange (FX) trading services revenue was up 14 percent in 2022 versus the prior year, reflecting higher FX spreads and increased clients on our platform, partially offset by lower client FX volumes. And front-office software and data revenue was up 14 percent compared to 2021, demonstrating the revenue diversification benefits of our business model.
OUR PURPOSE:
To help create better outcomes for the world’s investors and the people they serve.
Total expenses decreased by 1 percent in 2022, reflecting continued productivity improvements and currency translation benefits, partially offset by ongoing business investments and salary increases. Firm-wide productivity efforts achieved gross savings of approximately $320 million, partially self-funding internal investments and partially offsetting inflation pressures. Our businesses gained broad efficiency improvements through operations, automation, IT, and vendor and real estate management. We reinvested in the business to drive growth and further productivity.
I am pleased to report that in 2022 we continued to progress State Street toward its financial goals, delivering the third consecutive year of both pre-tax margin expansion and higher return on equity (ROE) despite the broad market downturns. Pre-tax margin increased to 27.4 percent, up 1.0 percentage point compared to last year, while ROE was 11.1 percent, up 0.4 percentage points year-over-year. Diluted earnings per share was $7.19, flat versus the prior year largely as a result of a higher share count. Capital return is important to our shareholders and remains an explicit target for us. In 2022, we increased our quarterly common stock dividend by 10.5 percent to $0.63 per share, and in 2022 we returned approximately $2.4 billion to our shareholders in the form of common stock dividends and as we resumed common share repurchases in the fourth quarter.
BUSINESS HIGHLIGHTS
INVESTMENT SERVICES: DELIVERING THE FUTURE TO OUR CLIENTS
Our Investment Servicing business provides a range of services and products for institutional investors of all types and across geographies worldwide. We enable our clients to invest and execute investment transactions daily in markets across the globe and more efficiently perform services associated with the execution, clearing, and settlement of securities transactions and related payments.
In May, Lou Maiuri was appointed President and Head of Investment Services in addition to his chief operating officer responsibilities. Investment Services achieved servicing wins of $1.9 trillion in 2022, with $3.6 trillion of new business yet-to-be installed at year-end, underscoring the power of our distinctive value proposition. Investment Servicing revenue increased 4 percent as compared to 2021, as the impact of weaker average equity and fixed income market levels on servicing fees was more than offset by stronger FX trading services revenue, an increase in software and processing fees, and robust NII growth.
Our Asia-Pacific (APAC) region — which last year celebrated its 40th anniversary since opening its first office in Hong Kong — achieved its best sales performance ever, with $470 billion in new wins. This included winning Australia’s largest custody mandate in history — the newly formed Australian Retirement Trust — among other important wins. Our continued strength and success in APAC were recognized by a number of regional awards, including being named Best Custodian for Asset Owners in the AsianInvestor Asset Management Awards, and Best Global Custodian in APAC (25 Years) and Best Middle- and Back-Office Provider in the Asia Asset Management Best of the Best Awards.
Supported by our strength and scale, our distinctive value proposition and diversified offerings, and our resilient operating model, I believe we are well-positioned to execute on each of our strategic priorities in 2023 as we advance toward achieving our goals.
Last year Investment Services continued to progress its transformation agenda, which focuses on operational and technology resiliency and productivity while driving innovation and growth. Highlights of that effort included further implementation of our infrastructure modernization effort, accelerated by key strategic partnerships with the industry’s leading technology and cloud service providers.
Central to our Investment Services strategy is the State Street AlphaSM platform — our comprehensive, front-to-back open architecture platform that empowers our clients to customize and manage their end-to-end investment process and operation — which continued to grow in 2022. Last year we won three new Alpha mandates, expanded 17 existing Alpha client relationships, and at year-end had 12 clients live on the platform.
Since launching Alpha in 2019, we have continued to enhance its capabilities and technology architecture: We have migrated Alpha to the cloud, onboarded new clients, and expanded the platform through key strategic partnerships with leading fintech companies. The State Street Alpha Data Platform, which is built on the Snowflake® data cloud, is live and enables data security and integrity for our clients while streamlining data flow across the front, middle, and back office.
We are now scaling and extending Alpha into new areas. Alpha for Private Markets, launched in 2021, allows institutional investors to fully manage the entire life cycle of their private equity, real estate, infrastructure, private debt, and fund of funds investments through a single fully integrated, digital, front-to-back platform — giving us an early advantage in the private markets space.
Our Alpha platform is a significant key differentiator for State Street. The platform is deepening our relationships with our clients as an enterprise outsource partner and is also driving core back-office servicing growth. Finally, Alpha is enabling us to build relationships in new client segments. In 2023, we plan to further advance Alpha implementation through ongoing software development and scaling core capabilities.
A key component of Alpha is Charles River Development (CRD). CRD is an industry-leading, cloud-deployed technology through which we provide front-office solutions and services for institutional investors. At 2022 year-end, 86 CRD clients were live on Microsoft Azure’s cloud solution. In 2023, CRD will deliver significant new software releases to clients, including a comprehensive fixed income upgrade.
We launched State Street Digital® in 2021 to help institutional investors prepare for and thrive in a digital finance future. We have prioritized the tokenization of various asset classes and the greater digitalization of State Street’s businesses. As institutional investors continue to recognize the benefits of tokenization and the utilization of blockchain technology, we have started to embed State Street Digital into the larger Investment Services product suite to help clients further capture synergies across governance, technical engineering, and products.
GLOBAL MARKETS’ OUTSTANDING YEAR OF GROWTH AND CLIENT SERVICE
State Street’s Global Markets and Financing — which supports our Investment Services clients — is a leading provider of liquidity, financing and research solutions. The business had an outstanding year of growth and innovation in 2022. Full-year 2022 FX trading services revenues increased 14 percent compared to 2021 and State Street once again earned several prestigious Euromoney FX Survey 2022 awards, including being named No. 1 FX provider to asset managers in 2022 (up from No. 2 last year). We are growing our markets and financing businesses by efficiently deploying capital and investing in technology across FX trading and securities finance and lending divisions. In May 2022, Eric Aboaf was appointed Vice Chairman and assumed oversight and accountability for State Street’s Global Markets business in addition to his duties as chief financial officer.
Our proprietary GlobalLink technology platform, which brings together the trading and liquidity infrastructure our clients need with digital custody and tokenization capabilities, continued to win new clients. And through State Street Associates®, our academic and financial research arm, we continued to distinguish our research as a true differentiator for clients. This is particularly so for our PriceStats® inflation-tracking tool, a leading source of high-frequency global inflation analytics, which proved especially valuable to clients and policymakers last year as it helped them better manage inflation risk and make better-informed asset allocation decisions.
In November, we launched Venturi, a new peer-to-peer financing platform. Venturi is specifically designed to connect buy-side firms with new sources of liquidity in the global repo markets, leveraging the breadth of our Investment Services client base while also providing a capital-efficient offering.
STATE STREET GLOBAL ADVISORS: INNOVATING TO MEET CHANGING MARKET ENVIRONMENTS
A pioneer in indexing and quantitative investing, creator of many of the industry’s first ETFs, and the world’s fourth-largest asset manager (by AUM), State Street Global Advisors serves some of the largest and most sophisticated institutional investors with investment solutions covering most major asset classes, investment styles, and vehicles.
Global Advisors’ full-year 2022 net inflows across Cash Solutions and State Street’s SPDR ETFs franchise of $22 billion demonstrated the strength and diversity of Global Advisors strategies, even in the face of down markets.
As cash became desirable to investors seeking yield and downside protection last year, Global Advisors provided clients with attractive investment opportunities. Our Cash Solutions franchise gained market share in money market funds in 2022 and helped Global Advisors become one of only five firms among the top 10 global institutional money market fund providers that saw net positive flows in 2022.
During 2022, Global Advisors launched a range of important solutions to address client demand for fixed income solutions with liquidity, including: the SPDR Blackstone High Income Fund (HBYL), an active fixed income ETF; SPDR MarketAxess Investment Grade 400 Corporate Bond ETF (LQIG), focused on the most liquid names in the market; and a collaboration with Barclays Quantitative Portfolio Strategy (Barclays QPS) to help meet the needs of investors seeking active fixed income strategies.
As investor demand for environmental, social and governance (ESG) investment solutions continued to grow, last year Global Advisors launched additional new ESG-related ETF offerings, including SPDR MSCI Climate Aligned ETFs (NZUS and NZAC), which are aligned with the Paris Climate Agreement, and the active SPDR Nuveen Municipal Bond ESG Fund (MBNE). In 2023, State Street celebrates the 30th anniversary of launching the first U.S.-listed ETF, thereby helping to open doors to markets, liquidity, and investment efficiency previously unavailable to the majority of investors.
Global Advisors continued to grow in defined contribution (DC) offerings, with $48 billion of overall inflows in 2022, including Target Date Fund franchise net inflows of $21 billion. Our innovative IncomeWise solution, developed in partnership with the University of California, Berkeley, continued to see increased client adoption. IncomeWise provides the benefit of longevity protection, helping DC participants maintain income in retirement.
Finally, toward year-end we welcomed Global Advisors’ new Chief Executive Officer, Yie-Hsin Hung. Yie-Hsin succeeds Cyrus Taraporevala, who retired in early 2023. Yie-Hsin’s deep experience positions her well to lead Global Advisors and realize its vision of being the world’s leading partner and provider of investment exposures and tailored asset management solutions.
ESG CONVICTION: DELIVERING VALUE TO INVESTORS AND SHAREHOLDERS
During a year in which ESG spurred much political rhetoric, State Street continued to serve clients under the proposition that ESG-related issues constitute both risks and opportunities for investors and portfolio companies. Most of our clients invest with a long-term horizon because their liabilities are similarly long-term. At its highest level, ESG is an evaluation and assessment of long-term risk for investors and associated implications for companies and policymakers. It is a more complete view of value creation and risk mitigation. Though we each have values, ESG for State Street is about value, not only values.
State Street employs a three-pronged approach to ESG: as a corporation, investment manager, and investment servicer. As ESG considerations evolve, State Street will continue to partner with clients, regulators, and the communities in which we live and work to navigate this changing landscape and the complexities that regulations and market dynamics may bring.
A brief word on climate, which today is the most actively debated aspect of ESG. We believe that climates are changing, and that emissions are in part driving this change. We believe that climate change presents both risks and opportunities that investors want disclosed. We believe that addressing climate change requires strategic plans that outline investment — not divestment — in high-emitting industries — to effect change and enable the world’s energy transition.
In 2022, we progressed our corporate ESG objectives through important initiatives that included the release of our Sustainability Bond Framework and issuance of our first Sustainability Bond, the proceeds of which will be exclusively allocated to projects with positive environmental impacts and/or positive social outcomes aligned to one or more of the U.N. Sustainable Development Goals.
State Street Global Advisors has long enabled and encouraged its institutional clients in separate accounts to vote their proxies. In 2022, Global Advisors announced it would extend proxy voting choice to more index fund investors.
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