State Street Corp. (STT:US), the third- largest custody bank, reported third-quarter operating profit that beat analysts’ estimates as it earned higher fees for managing client money. Shares rose the most in seven months.
Net income on an operating basis declined 0.6 percent to $473 million, or 99 cents a share, from $476 million, or 96 cents, a year earlier, the Boston-based company said today in a statement. The results, which exclude certain items, beat the average estimate (STT:US) of 96 cents a share of 22 analysts surveyed by Bloomberg.
“They’ve done generally all right in winning new customers, but the interest rate environment has just been stagnant, more than anything,” Marty Mosby, a Memphis, Tennessee-based equity analyst at Guggenheim Securities LLC, said in an interview before results were announced.
State Street Chief Executive Officer Joseph Hooley, struggling to boost growth in a low-interest rate environment, has sought to increase shareholder returns by repurchasing shares, raising the firm’s dividend and cutting jobs. Four large investors, frustrated with State Street’s share performance, have pushed the company’s board to replace Hooley or Chief Financial Officer Edward Resch, according to a report yesterday in the Financial Times.
Hooley, in a telephone interview today, declined to comment on the report that investors had pushed for management changes. During the quarterly conference call discussing earnings, none of the analysts asked Hooley to address the report.
“I’m fairly active with regard to my outreach to shareholders,” Hooley said in the interview. “I take all that input and that influences how I run the company at some level.”
The company is focused on returning capital to shareholders and would be “very cautious” in considering future acquisitions, Hooley told analysts in a conference call today. The message signaled a shift in emphasis that reflected a better potential return on the company’s shares compared with opportunities for acquisitions, Hooley said in a telephone interview after the conference call.
“The rate of return on buying back our own stock has made the hurdle higher in making acquisitions,” he said.
State Street rose the most since March 13, increasing 4.7 percent to close at $43.53 in New York. State Street has gained 8 percent this year, trailing the 18 percent advance by rival Bank of New York Mellon Corp. (BK:US) and the 18 percent increase by the Standard & Poor’s 20-company index of asset managers and custody banks.
“We think the stock could trade up slightly today given fairly depressed expectations and core revenue trends that were reasonably good versus investor fears,” Brian Bedell, a New York-based equity analyst with ISI Group Inc., wrote in a research note published today.
State Street’s custody assets climbed 10 percent to $17.3 trillion after global stocks rose 18 percent in the year ended Sept. 30 as measured by the MSCI ACWI Index. The amount of money the firm manages for investors rose 11 percent to $2.1 trillion.
Revenue from investment-management fees rose 9.6 percent, boosted by deposits to exchange-traded funds, including new ETFs with higher fees than the firm’s broad market-tracking products, Hooley said in the interview. Fees from custody servicing fell 0.5 percent, hurt by a shift by investors away from securities that generate higher fees, such as emerging market stocks, to lower-paying holdings, including cash.
“Although equity markets have improved, clients remain conservative in their investment allocations, which adversely affects our revenue,” Hooley said in the statement.
Sales in the third quarter declined 2.7 percent to $2.35 billion, hurt by a 44 percent decrease in foreign-exchange fees to $115 million.
Expenses dropped 2.9 percent, driven by a 5.1 percent decline in compensation and employee benefits to $916 million.
State Street won new business mandates in the quarter that added $211 billion to custody assets and $78 billion to investment assets.
The company repurchased 11.4 million shares of common stock in the third quarter for $480 million. The company has $840 million remaining in a $1.8 billion repurchase program that expires in March 2013.
Low interest rates hurt custody banks by reducing the return they make on their own investments and lending. Low rates have also forced State Street to waive some fees on money-market funds to keep client returns above zero. The U.S. Federal Reserve has held its benchmark interest rate at zero to 0.25 percent since December 2008 in an attempt to stimulate lending and economic growth.
State Street came under pressure from investor Nelson Peltz in October 2011 to increase profitability. Peltz, founder and chief executive officer of Trian Fund Management LP in New York, urged the firm to make a clearer commitment to cost-cutting, put shareholder returns ahead of acquisitions and consider selling its money-management unit. Peltz’s Trian was the eighth-biggest holder of State Street’s shares as of June 30, according to data compiled by Bloomberg.
Hooley has cut 2,250 jobs in the past two years to lower costs, raised the firm’s dividend in March to its 2008 level and announced a $1.8 billion share repurchase program through March 31, 2013.
Hooley also continued making acquisitions, agreeing in July to purchase Goldman Sachs Group Inc.’s hedge-fund administration unit for $550 million in cash. State Street completed the transaction yesterday, according to a regulatory filing.
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. Discount accretion added $40 million to net income in the second quarter.
Using generally accepted accounting principles, or GAAP, State Street’s net income rose to $654 million, or $1.36 a share, from $543 million, or $1.10, a year earlier.
GAAP earnings include a net, after-tax benefit of 35 cents a share, most of which relates to claims associated with the 2008 bankruptcy of Lehman Brothers Holdings Inc.
State Street estimated its Tier 1 common ratio, a measure of financial strength as calculated under Basel III rules, rose in the third quarter to 11.3 percent from 11 percent.
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.
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