UPDATE: Shift To Safety, Lower Volumes Hit State Street Foreign Exchange Revenues

Lower market volumes and investors' preferences for safer assets drove down State Street Corp.'s (STT) foreign exchange trading revenues in 2011.

The uncertain global economic backdrop, including the euro-zone sovereign debt crisis, triggered a decline in capital markets' trading volume, which in turn hit State Street's trading revenues, executives from the bank said Wednesday.

The environment in the second half of 2011 "significantly affected investor confidence," said the firm's Chief Executive Joseph Hooley in a fourth-quarter earnings call Wednesday.

Foreign-exchange trading revenues fell 12% in 2011 from the previous year as investors shed riskier assets from their portfolios. In the fourth quarter, currency trading revenues of $150 million fell 26% from the previous quarter, due primarily to weaker volumes and lower market volatility, the firm said.

The move to more conservative asset classes resulted in lower revenues for trading services overall for the firm, said Chief Financial Officer Edward Resch.

Trading services revenue, which includes foreign exchange trading and brokerage and other fees, was $273 million in the fourth quarter, down 18% from $334 million in the third quarter of 2011.

"Investors reacted to these worldwide economic events by adjusting" their portfolio mix, primarily to cash and fixed income from higher risk assets, he said. "We have seen investors become more risk averse due to the uncertainty in Europe."

Within its foreign exchange business, State Street saw a decline in its indirect foreign exchange products, with more clients making transactions using direct services or electronic exchange services, Resch said.

Hooley said he's not surprised that clients are using alternative platforms for executing foreign exchange trades, but no customers are leaving. He added that State Street will only be looking to "drive more volume in the foreign exchange business."

State Street, along with other custody banks, has been the target of lawsuits and regulatory probes over how they process currency transactions for clients, including allegations they routinely overcharged for the service over a decade.

-By Erin McCarthy, Dow Jones Newswires; 212-416-2712; erin.mccarthy@dowjones.com @djfxtrader

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