| STATE STREET CORP ITEM 1A RISK FACTORS This Form 10-K contains statements (including, without limitation, statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Form 10-K under Item 7), that are considered “forward-looking statements” within the meaning of US federal securities laws |
| In addition, State Street may make other written or oral communications from time to time that contain forward-looking statements |
| Forward-looking statements, including statements as to industry trends, future expectations of State Street and other matters that do not relate strictly to historical facts, are based on certain assumptions by management, and are often identified by such forward-looking terminology as “expect,” “look,” “believe,” “anticipate,” “may,” “will,” “trend” and “goal,” or similar statements or variations of such terms |
| Forward-looking statements may include statements about State Street’s confidence and strategies and its expectations about revenue and market growth, acquisitions and divestitures, new technologies, services and opportunities, and earnings |
| Forward-looking statements are subject to various risks and uncertainties, which change over time, and speak only as of the date they are made |
| In addition to factors mentioned elsewhere in this Form 10-K or previously disclosed in our SEC filings, including our reports on Form 10-Q and Form 8-K (accessible on the SEC’s website at www |
| gov or on our website at www |
| statestreet |
| com), the factors discussed below, among others, could cause actual results to differ materially from those contemplated by the forward-looking statements, and future results could differ materially from historical performance |
| State Street undertakes no obligation to revise the forward-looking statements contained in this Form 10-K to reflect events after the date of this Form 10-K State Street Corporation 5 _________________________________________________________________ If market interest rates rise, our securities finance and net interest revenues can be negatively affected in the short term |
| The levels of global market interest rates, the shape of the yield curve, the direction and speed of interest-rate changes, and the asset and liability spreads relative to the currency and geographic mix of our interest-bearing assets and interest-bearing liabilities affect our securities finance and net interest revenue |
| In the short term, our net interest revenue and securities finance revenue benefit from falling interest rates and are negatively affected by rising interest rates because our interest-bearing liabilities generally reprice sooner than our interest-earning assets |
| The rate of adjustment to higher or lower rates will depend on the relative duration of assets and liabilities |
| In general, sustained lower interest rates, a flat yield curve and narrow interest-rate spreads have a constraining effect on net interest revenue and securities finance revenue growth |
| Market interest rates, which affect the economic value of our demand deposits, also impact the value of certain derivative financial instruments whose changes in value are reflected in trading services and processing fees and other revenue in our consolidated statement of income |
| If values in worldwide securities markets decline, our revenue and earnings can be adversely affected |
| As asset values in worldwide financial markets increase or decrease, our opportunities to invest and service financial assets change |
| Because a portion of our fees is based on the value of assets under custody and management, fluctuations in the valuation of worldwide securities markets will affect revenue |
| We estimate that a 10prca increase or decrease in worldwide equity values would result in a corresponding change in our total revenue of approximately 2prca |
| If fixed income security values worldwide were to increase or decrease by 10prca, we would anticipate a corresponding change of approximately 1prca in our total revenue |
| Because many of the costs of providing our services are relatively fixed, a decline in revenue could have a disproportionate effect on our earnings |
| If foreign exchange rate volatility decreases, our revenue can be adversely affected |
| The degree of volatility in foreign exchange rates can affect our foreign exchange trading revenue |
| In general, we benefit from currency volatility, and foreign exchange revenue is likely to decrease during times of decreased currency volatility |
| In addition, as our business grows globally, our exposure to changes in foreign currency exchange rates could impact our level of revenue, expense and net income and the value of our investments in our non-US operations |
| If we do not maintain our capital requirements and our status as a “well-capitalized” financial holding company, there could be an adverse effect on the manner in which we do business and on the confidence of our customers in us |
| Under regulatory capital adequacy guidelines, we and our principal banking subsidiary, State Street Bank, must meet guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items |
| Failure to meet minimum capital requirements could have a material effect on our financial condition and could subject us to a variety of enforcement actions, as well as certain restrictions on our business |
| Failure to maintain the status of “well capitalized” under the regulatory framework could affect our status as a financial holding company and eligibility for a streamlined review process for acquisition proposals, and deterioration in the confidence that our customers have in us, which can lead to a decline in the demand for our products and affect the prices that we are able to charge for our services |
| In addition to being well-capitalized, State Street and State Street Bank are subject to guidelines that involve qualitative judgments by regulators about the entities’ status as well-managed and the entities’ compliance with Community Reinvestment Act obligations |
| If there is a decline in individual savings rates, our business can be adversely affected |
| We generally benefit when individuals invest their savings in mutual funds, other collective funds and defined contribution plans |
| Changes in savings rates or investment styles may affect revenue |
| If there is a decline in the savings rates of individuals, or if there is a change in investment preferences that leads to fewer 6 State Street Corporation _________________________________________________________________ investments in mutual funds, other collective investment funds, and defined contribution plans, our revenue may be adversely affected |
| While increased cross-border investing by our customers worldwide benefits our revenue, increased worldwide economic and political instability can adversely affect our business |
| Our revenue may increase or decrease depending upon the extent of increases or decreases in cross-border investments made by our customers |
| The terrorist attacks that took place in the United States on September 11, 2001, and subsequent military action and terrorist activities, have caused economic and political uncertainties |
| These activities and the national and global efforts to combat terrorism, and other military activities and outbreaks of hostilities have affected and may further adversely affect economic growth |
| Such events could result in decreased cross-border investment activities and may have other adverse effects on many companies, including ours, in ways that are not predictable |
| If there is a decline in the pace at which customers outsource their middle office or investment management operations, our business can be adversely affected |
| In recent years, investment manager and hedge fund manager operations outsourcing have been areas of rapid growth in our business |
| If we do not perform effectively under our outsourcing contracts, we may not generate the operating margins that we expect, or we may lose customers before we earn back our investment in the contracts |
| We enter into long-term contracts to provide middle office or investment manager and hedge fund manager operations outsourcing services to customers |
| Services that we provide include trade order management, trade support and fail management, reconciliations, cash reporting and management, custodian communications for settlements, accounting systems, collateral management and information technology development |
| These contracts often extend eight to ten years and require considerable up-front investments by us, including technology and conversion costs |
| Performance risk exists in each contract, since these contracts are dependent upon the successful conversion and implementation of the activities onto our own operating platforms |
| Our operating margins, and as a result our profitability, are largely a function of our ability to accurately calculate pricing for our services, our ability to control our costs and our ability to maintain the relationship with the customer for an adequate period of time to recover the up-front investment |
| The long-term nature of these contracts creates a risk that our pricing for the products and services we provide might not be adequate to generate expected operating margins |
| If we do not successfully integrate businesses that we acquire, or successfully complete divestitures, we may not realize the expected benefits of the transaction |
| Acquisitions of complementary businesses and technologies, development of strategic alliances and divestitures of portions of our business are an active part of our overall business strategy |
| We have completed several acquisitions, alliances and divestitures in recent years |
| However, there can be no assurance that services, technologies, key personnel or businesses of acquired companies will be effectively assimilated into our business or service offerings, that alliances will be successful, or that related expectations concerning future revenue growth or cost savings will be achieved |
| In addition, we may not be able to successfully manage the conversion of divested businesses to the buyer on satisfactory terms, if at all, and divestitures may result in a reduction of total revenue and net income |
| If we are subject to changes in tax legislation, the interpretation of existing tax laws worldwide or changes in accounting principles, we may be required to report a material charge to our results of operations |
| In the normal course of business, we are subject to challenges from US and non-US tax authorities regarding the amount of taxes due |
| These challenges may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions |
| In recent years, the US Internal Revenue Service, or “IRS,” has proposed to disallow tax deductions related to cross-border leasing State Street Corporation 7 _________________________________________________________________ transactions, which could have an adverse impact on our results of operations |
| Additionally, the Financial Accounting Standards Board has been considering making changes to the accounting guidance related to uncertain tax positions and leveraged leases |
| While such changes may not have an economic impact on our business, these changes could affect the attainment of our current financial goals |
| If the pace of pension reform slows, or if pension reform does not occur, our revenue and earnings can be adversely affected |
| We expect our business to benefit from worldwide pension reform that creates additional pools of assets that use custody and related services, and investment management services |
| The pace of pension reform and resulting programs, including public and private pension schemes, may affect the pace of our revenue growth |
| If we do not maintain compliance with governmental regulation, we can be subject to fines, penalties or restrictions of business in the jurisdiction where the violation occurred, which can adversely impact our business |
| Our businesses are subject to stringent regulation and examination by US federal and state governmental and regulatory agencies and self-regulatory organizations (including securities exchanges), and by non-US governmental and regulatory agencies and self-regulatory organizations |
| In addition, our customers have a broad array of complex and specialized servicing, confidentiality and fiduciary requirements |
| We have established policies, procedures and systems designed to comply with these regulatory and operational risk requirements |
| However, as a global financial services institution, we face complexity and costs in our worldwide compliance efforts |
| We also face the potential for loss resulting from inadequate or failed internal processes, employee supervisory or monitoring mechanisms, or other systems or controls, and from external events, which could have a material impact on our future results of operations |
| Also, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers or maintain access to capital markets, or could result in enforcement actions, fines, penalties and lawsuits |
| If, for regulatory reasons, we are limited in our ability to invest additional capital in subsidiaries outside the United States, we may not be able to stay competitive in those markets, and our business could suffer |
| Federal laws and related regulations limit the amount that banks, including State Street Bank, may invest in non-US subsidiaries |
| This limitation could affect the pace of future international expansion by State Street Bank through this type of subsidiary |
| Investigations into the financial services industry can adversely affect our business |
| We are broadly involved with the global securities industry including, in particular, the mutual fund industry |
| Financial reporting irregularities involving large and well-known companies, and governmental and regulatory investigations of securities and mutual fund industry practices and behavior, may have adverse effects on us in ways that are not predictable |
| Governmental and regulatory agencies have sought information from us in connection with investigations relating to that industry that has resulted in additional expenses and staffing resources in providing responses |
| If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations |
| External events, including terrorist or military actions, or an outbreak of disease, such as Asian Influenza, or “bird flu,” and resulting political and social turmoil could cause unforeseen damage to our physical facilities, or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions |
| Additionally, our customers, vendors and counterparties could suffer from such events |
| Should these events affect us, or the customers, vendors or counterparties with which we conduct business, our results of operations could be adversely affected |
| 8 State Street Corporation _________________________________________________________________ If we are not able to anticipate and keep pace with rapid changes in technology, or do not respond to rapid technological changes in our industry, or if growth in the use of technology in business is not as rapid as in the past, our business can be adversely affected |
| Technological change often creates opportunities for product differentiation and reduced costs, as well as the possibility of increased expenses |
| Developments in the securities processing industry, including shortened settlement cycles and straight-through-processing, will result in changes to existing procedures |
| Alternative delivery systems have emerged, including the widespread use of the Internet |
| Our financial performance depends, in part, on our ability to develop and market new and innovative services, and to adopt or develop new technologies that differentiate our products or provide cost efficiencies |
| The risks inherent in this process include rapid technological change in the industry, our ability to access technical and other information from customers, and the significant and ongoing investments required to bring new services to market in a timely fashion at competitive prices |
| A further risk is the introduction by competitors of services that could replace or provide lower-cost alternatives to our services |
| If we are unsuccessful in protecting our proprietary rights, or if we are found to have violated the proprietary rights of others, we can experience a decline in revenue or an increase in expenses |
| We use trademark, trade secret, copyright, patent and other proprietary rights procedures to protect our technology |
| Despite these efforts, we cannot be certain that the steps taken by us to prevent unauthorized use of proprietary rights are sufficient to prevent misappropriation of technology, particularly outside the United States where laws or law enforcement practices may not protect proprietary rights as fully as in the US In addition, no assurance can be given that the courts will adequately enforce contractual agreements that we have entered into to protect our proprietary technology |
| If any of our proprietary information were misappropriated by, or otherwise disclosed to, our competitors, our competitive position could be adversely affected |
| In the event a third party asserts a claim of infringement of its proprietary rights, obtained through patents or otherwise, against us, we may be required to spend significant resources to defend against such claims, develop a non-infringing program or process, or obtain a license to the infringed process |
| If our access to the capital markets is limited, our capital resources and liquidity could be adversely affected |
| We depend on access to global capital markets to provide us with sufficient capital resources and liquidity to meet our commitments and business needs and accommodate the transaction and cash management needs of our customers |
| Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors or counterparties participating in the capital markets in general or with us in particular, or a downgrade of our debt rating, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity |
| If there is a significant economic downturn in either a country or a region, or the failure of a significant individual counterparty, our credit and counterparty risk profile could be adversely affected and result in loss |
| Our focus on large institutional investors and their businesses requires that we assume credit and counterparty risk, both on- and off-balance sheet, in a variety of forms |
| We provide, on a limited basis, traditional loan products to customers, based upon credit quality and other factors |
| We also provide customers with off-balance sheet liquidity and credit enhancement facilities in the form of letters of credit, lines of credit and liquidity asset purchase agreements, subject to credit analysis and an approval and review process |
| We invest in financial instruments, including investment securities and derivative instruments, which are also subject to risk management processes |
| The credit quality of our on- and off-balance sheet exposures may be affected by many factors, such as economic and business conditions or deterioration in the financial condition of an individual counterparty or group of counterparties |
| In the event of poor economic conditions in a particular country or region, or the failure of a significant counterparty or group of counterparties, there is a greater likelihood that more of our customers or counterparties could become delinquent on their loans or other obligations to us, or that the State Street Corporation 9 _________________________________________________________________ special purpose entities we administer could experience deterioration in asset performance |
| This could result in higher levels of credit-related losses, which could adversely affect our earnings |