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State Street Corp
Bank of New York Mellon Corp/The
Northern Trust Corp
State Street Corp. (STT), the third- largest custody bank, rose the most in more than a year after saying it will eliminate 630 jobs in its third round of cuts in two years to bolster profit.
The job cuts, equal to about 2 percent of the company’s workforce, brings reductions in the past two years to almost 2,900. Fourth-quarter operating profit rose 15 percent, as market gains boosted assets and the fees they generate, the Boston-based company said today.
Chief Executive Officer Joseph Hooley is seeking to offset the impact of record-low interest rates and subdued trading by clients. State Street, which has come under pressure from shareholders including Trian Fund Management LP’s Nelson Peltz to improve profitability, repurchased 10.9 million shares for $480 million in the fourth quarter, helping earnings per share exceed analysts’ estimates.
“I meet with shareholders all the time to try to understand their view of the business,” Hooley said today in an interview. “I think we’re making the right move in a challenging environment,” he said, referring to the job cuts.
State Street rose 5.9 percent to close at $53.36 in New York, the biggest increase since Nov. 30, 2011. The stock has gained 34 percent in the past year, compared with a 29 percent increase by the Standard & Poor’s 20-company index of asset managers and custody banks.
Net income on an operating basis increased to $521 million, or $1.11 a share, from $454 million, or 93 cents, a year earlier. Earnings beat the $1.01-a-share average estimate (STT) of 22 analysts surveyed by Bloomberg. In addition to the share buybacks last year, the company has set aside $400 million for repurchases through the end of March.
“The big impact was from a fairly significant share repurchase,” Marty Mosby, a Memphis, Tennessee-based equity analyst at Guggenheim Securities LLC, said in an interview. “They accelerated their repurchase plan, brought the share count lower and pushed up earnings per share.”
Hooley last year said he was taking a “cautious” approach to acquisitions. State Street made at least five acquisitions since he took over in March 2010. The purchases have drawn criticism from Peltz, whose Trian was the ninth-biggest holder (STT) of State Street’s shares as of Sept. 30, according to data compiled by Bloomberg.
Edward Resch, the firm’s chief financial officer for more than a decade, will retire this year when a successor is found, the company said in November.
State Street has struggled to raise operating profit over the past four years as the U.S. Federal Reserve held its benchmark interest rate at zero to 0.25 percent since December 2008 in an attempt to stimulate borrowing and economic growth. Low rates hurt custody banks by reducing the return they make on their own investments and lending. They’ve also forced State Street to waive some fees on money-market funds to keep client returns above zero.
Rising markets helped State Street in 2012 as the MSCI ACWI Index (MXWD) of global equities gained 13 percent, following a 9.4 percent decline in 2011. State Street charges custody and investment management fees based on the amount of money it oversees for clients.
Revenue rose 7 percent to $2.46 billion, driven by a 29 percent jump in investment-management fees as the amount of money State Street invests for clients rose. Investment assets were boosted by 13 percent, helped by $24 billion in net client deposits including $13 billion to exchange-traded funds, Hooley said in the interview. State Street is the second-biggest provider of ETFs.
Assets under custody rose 12 percent to $24.4 trillion, and the fees they generate rose 8.8 percent. Expenses increased 4.8 percent to $1.71 billion.
Clients having been taking money out of bonds and putting it into domestic and international stocks since late last year, Hooley said in a conference call with analysts. The shift helps State Street as fees for overseeing and managing stock investments are typically higher.
Hooley said he didn’t expect the shift to continue throughout 2013.
“I’m just not ready to say the all-clear signal has been given” for investors to take on more risk, he said. The unresolved debate in Washington over raising the ceiling on U.S. debt was the biggest threat to equity markets in the short term, he said.
Bank of New York Mellon Corp (BK)., the largest custody bank, said on Jan. 16 that fourth-quarter net income rose 23 percent from a year earlier to $622 million, or 53 cents a share. Chicago-based Northern Trust Corp. (NTRS), the third-biggest independent custodian, said fourth-quarter earnings rose 29 percent to $167.7 million, or 69 cents a share.
The increase for both companies was driven by rising equity markets and by restructuring costs booked in the fourth quarter of 2011 that weren’t repeated last year. Low interest rates and lower foreign exchange trading helped keep revenue growth to about 2 percent for both BNY Mellon and Northern Trust.
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.
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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