State Street Corp. (STT:US), the third- largest custody bank, said first-quarter profit fell 6.6 percent as expenses rose more than twice as fast as revenue.
State Street’s net income on an operating basis decreased to $410 million, or 84 cents a share, from $439 million, or 88 cents, a year earlier, the Boston-based company said today in a statement. Excluding certain items, 22 analysts surveyed by Bloomberg estimated (STT:US) State Street to earn of 87 cents a share on average. Rival Northern Trust Corp. (NTRS:US) overcame higher expenses to report a 6.8 percent increase in net income.
State Street’s compensation costs are “driving the miss,” compared to analysts’ estimates, Logan Purk, an equity analyst at Edward Jones & Co. in St. Louis, said in an interview. “That could make some investors pause, but they are in a multiyear plan to reduce costs.”
State Street’s expenses on an operating basis climbed 6.9 percent to $1.8 billion, driven by a 9.2 percent jump in compensation-related costs. Chief Executive Joseph Hooley, who has cut jobs and made acquisitions in an effort to counter the impact from interest rates near zero, said the company is on track to reach a goal for $94 million in annual pretax expense savings this year.
“We remain committed to managing expenses carefully and continue to expect our compensation-to-revenue ratio to decline in 2012,” Hooley said in the statement. That forecast assumes a “modest” increase in revenue on an operating basis, he said.
State Street rose 2 percent to $44.55 at the close in New York trading. Northern Trust gained 1.5 percent to $46.87. The companies have gained 11 percent and 18 percent, respectively, this year, compared with a 17 percent increase in the 20-company Standard & Poor’s index of asset managers and custody banks.
Revenue and Assets
State Street’s operating revenue increased 3.1 percent from a year ago to $2.4 billion as assets under custody rose by 1.3 percent to $16.9 trillion, boosted by $233 billion in new custody assets won in the first quarter.
The amount of money State Street invests for clients decreased 6 percent to $1.99 trillion, helping to keep investment management fees unchanged at $236 million. Fees from securities lending rose 47 percent to $97 million.
The MSCI ACWI Index (MXWD) of global stocks declined 3 percent in the 12 months through March 31.
“Asset valuations compared to last year are still down somewhat,” Marty Mosby, a Memphis-based analyst for Guggenheim Securities LLC, said in a telephone interview.
Northern Trust, based in Chicago, said net income increased to $161.2 million, or 66 cents a share, from $151 million, or 61 cents a share, a year earlier. Profit matched the 66-cent average estimate of 13 analysts surveyed by Bloomberg.
Northern Trust outperformed State Street as its assets grew faster. Custody assets increased 5.5 percent and the money the firm invests for clients by 8.2 percent, helping fee income to rise by 12 percent. Total revenue increased 7.5 percent, while expenses jumped 11 percent.
Northern Trust, unlike its larger rivals, hasn’t been hit with lawsuits over its pricing of foreign-exchange transactions. State Street and Bank of New York Mellon Corp. face allegations from California, New York and other states that they defrauded public pension funds by overcharging for a service known as indirect foreign exchange, or standing instruction.
State Street’s net income fell to $417 million, or 85 cents a share, from $466 million, or 93 cents a share, a year earlier. State Street’s operating profit excludes money earned from the sale or maturing of bonds whose value was written down in May 2009, which the company records as “discount accretion” within net interest income.
Net income was reduced by 3 cents a share by pretax acquisition and restructuring costs and by 2 cents a share for litigation-related settlements in the first quarter, according to the statement, which didn’t provide further details about the settlements.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.
The U.S. Federal Reserve said in March that State Street was the second-strongest among the 19 largest U.S. banks when the Fed tested their ability to withstand a recession under current capital plans. Bank of New York Mellon Corp. (BK:US), the largest custody bank, was the strongest.
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