State Street Beats on Lower Expenses - Analyst Blog
October 16 2012 - 7:39AM
Zacks
State Street Corporation (STT) reported third
quarter 2012 operating earnings of 99 cents per share, outpacing
the Zacks Consensus Estimate by 3 cents. Though this compares
favorably with the previous-year quarter earnings of 96 cents, it
came in slightly below the last quarter earnings of $1.01.
After considering certain non-recurring items such as acquisition
costs, restructuring expenses, litigation settlement costs, loss on
sale of Greek investment securities as well as discount accretion
related to former conduit securities and claims associated with
Lehman bankruptcy, net income was $654 million or $1.36 per share.
This compares favorably with the year-ago net income of $543
million or $1.10 per share and the prior-quarter net income of $480
million or 98 cents per share.
Better-than-expected results benefited from improvement in net
interest revenue and fall in operating expenses. Moreover, capital
ratios and asset position remained robust during the quarter.
However, decline in fee revenue was the primary dampener.
State Street’s net income available to shareholders was $473.0
million on an operating basis, down 1% from $476 million in the
prior-year quarter and 4% from $494 million in the prior
quarter.
Earlier this week, State Street closed the deal to acquire Goldman
Sachs Administration Services (GSAS) – a leading hedge fund
administrator – from The Goldman Sachs Group, Inc.
(GS). The all-cash deal worth $550 million was announced in July.
The acquisition will further strengthen State Street’s hedge fund
business.
Behind the Headline
Revenue for the quarter was $2.36 billion, down 2.9%
year-over-year. Revenue on an operating basis came in at $2.35
billion, declining 2.7% from $2.41 billion in the prior-year
quarter. Operating revenue was also lower than the Zacks Consensus
Estimate of $2.39 billion.
For the reported quarter, net interest revenue on an operating
basis grew 8% year-over-year to $611 million. The improvement was
primarily driven by higher earning assets and lower funding costs,
partly offset by lower asset yields. Net interest margin was 1.44%
in the quarter, in line with the prior-year quarter.
Fee revenues came in at $1.72 million, waning 7% from $1.84 billion
in the previous-year quarter. The decline can be attributed to
lower trading service fees along with fall in processing and other
fees, partially offset by higher investment management fees and
securities finance fees.
On an operating basis, non-interest expenses were $1.66 billion,
declining 2.9% from the prior-year quarter. The fall was due to
lower compensation and employee benefits, reduced transaction
processing service costs as well as occupancy costs, partially
mitigated by higher information systems and communication
expenses.
Asset Position
Total assets under custody and administration were $23.44 trillion
as of September 30, 2012, up 9% on a year-over-year basis.
Moreover, State Street’s total assets under management stood at
$2.07 billion, up 11.3% from the prior-year quarter.
Capital and Profitability Ratios
State Street’s capital ratios continued to remain strong. As of
September 30, 2012, Tier 1 capital ratio was 19.8%, up from 17.9%
as of September 30, 2011. Likewise, Tier 1 common to risk-weighted
assets increased to 17.8% as of September 30, 2012 from 16.0% as of
September 30, 2011.
Further, the estimated Basel III Tier 1 common ratio was
approximately 11.3% as of September 30, 2012, up from 11.0% as of
June 30, 2012. For the reported quarter, return on common equity
(on an operating basis) came in at 9.6% compared with 9.8% in the
prior-year quarter.
Share Repurchase
In March, State Street, after receiving the approval for its
capital plan, announced a new share repurchase program authorizing
the purchase of up to $1.8 billion of stock through the first
quarter of 2013. During the reported quarter, State Street bought
back 11.4 million shares at an aggregate cost of $480 million.
The company has $840 million remaining under its stock repurchase
authorization, effective through March 2013.
Our Take
We anticipate State Street’s restructuring programs along with
stable core servicing and investment management franchises to help
offset the weakness caused by the slow economic recovery. Further,
the recent acquisitions will augment revenue.
Nevertheless, given the ongoing weakness in the mortgage market,
we remain concerned about the considerable amount of
mortgage-backed and asset-backed securities in the company’s
investment portfolio.
Also, the low interest rate environment and deteriorating net
interest revenue are expected to dent State Street’s top line in
the upcoming quarters. Despite these concerns, sound capital
deployment activities will boost investors’ confidence in the
stock.
State Street currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
maintain a long-term Neutral recommendation on the shares.
GOLDMAN SACHS (GS): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis Report
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