State Street Shows That Slow and Steady Wins the Race

If there's one thing that probably shouldn't surprise you about the Federal Reserve's announcement yesterday, it's that the massive custodial bank State Street (NYSE: STT  ) had its proposed capital plan for 2013 approved by the central bank. According to the press release issued by the bank immediately following the news, its board "has approved a new common stock purchase program authorizing the purchase of up to $2.1 billion of its common stock through March 31, 2014." By means of comparison, throughout 2012, State Street repurchased $1.8 billion, or 6.3%, of its outstanding common stock.

Surprise or not, these results add further credibility to State Street's incredibly solid business model. As you can see in the chart below, the Boston-based bank went into last week's stress tests with a Basel I tier 1 common capital ratio of 17.8%. That made it the best capitalized of the nation's largest banks by far. The runner up, Bank of New York Mellon (NYSE: BK  ) , came in second with a ratio of 13.3%, or 450 basis points less than State Street's. Meanwhile, the average of the 18 banks tested was a comparatively measly 11.1%.

Indeed, even after being subjected to the Fed's "severely adverse" economic scenario -- in which, among other things, the unemployment rate is projected to increase beyond 12% in the middle of next year -- State Street's tier 1 capital ratio fell to 12.8% -- that is, still well above the level the average bank reported going into the test. And once the aforementioned capital plans are taken into consideration, the bank's ratio goes to 9.7%.

Source: Comprehensive Capital Analysis and Review 2013: Assessment Framework and Results

Given this performance, one may wonder why State Street didn't also ask for permission to increase its quarterly dividend payout. It didn't because it had already recently increased it. On February 21, 2013, the bank announced a quarterly common stock dividend of $0.26 per share. This represented an increase of $0.02 per share from the $0.24 per share of common stock quarterly dividend paid on January 15, 2013. In addition, as my colleague David Hanson pointed out yesterday, after last year's stress tests, the Fed approved a 33% increase in its payout. State Street, in other words, had effectively beaten the Fed to the punch this go-around.

At the end of the day, State Street's performance in last week's stress tests and yesterday's comprehensive capital analysis and review seems to prove once again the old adage that "slow and steady wins the race." To learn about another bank that proves this point, download our comprehensive report on the Bank of New York Mellon. To access your very own copy of this report instantly, simply click here now.


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