By Saabira Chaudhuri
State Street Corp.'s quarterly profit missed Wall Street analyst
views Friday, and operating expenses climbed, triggering a stock
slide.
Shares sank 4.3% in midday trading as the trust bank reported
that compensation and "other expenses" jumped both from a year
earlier and the prior quarter. On a call, State Street Chief
Financial Officer Michael W. Bell said he expects "some upward
pressure on regulatory compliance costs."
The Boston-based trust bank reported a profit of $545 million,
or $1.22 a share, up from $468 million, or $1 a share, a year
earlier. After stripping out one-time items, earnings rose to $1.15
from $1.11 a share. But analysts polled by Thomson Reuters had
forecast earnings of $1.19 a share.
Although the bank logged a stronger performance in servicing
fees, results in the business were affected by what Chief Executive
Joseph L. Hooley said were "pretty negative" fixed-income flows
during the course of 2013, which "outstripped positive equity
flows" in the second half of the year.
Servicing fees--easily the largest contributor to revenue--rose
7.1% from a year earlier and 1.7% from the third quarter, to $1.23
billion.
In addition to weaker fixed-income markets, Mr. Hooley said,
"the emerging-markets pullback in the fourth quarter was also a
little bit of a headwind" for servicing fees.
State Street logged lower revenue from its trading-services
arm--which includes foreign-exchange trading revenue and brokerage
and other fees--and Mr. Bell attributed that to lower
foreign-exchange-trading revenue from lower market volatility.
Trading services fees fell 6.2% from a year earlier and 11% from
the third quarter, to $228 million.
Management fees rose 12% from a year earlier, to $290 million,
but processing fees and other revenue slumped 33% to $53
million.
Overall, State Street's operating revenue climbed 2.8% to $2.53
billion, modestly topping analyst estimates of $2.5 billion.
Operating expenses climbed 2.7% from the fourth quarter of 2012
and 4.3% from the prior quarter, to $1.76 billion. The rise was
driven partly by higher compensation and employee-benefits
expense.
Additionally, the company's so-called other expenses showed a
10% jump from the year earlier and a 16% rise from the third
quarter, to $292 million.
The rise in other expenses is a "key question, I think, in terms
of the stock reaction," said Jefferies analyst Ken Usdin. "Simply
said, the expenses were higher than expected."
On the call, Mr. Bell said other expenses "can bounce around
quarter to quarter, because some of the costs in this category are
pretty lumpy," but he said he doesn't think the fourth-quarter
number is reflective of future costs.
"I'd say the big wild card really are the higher legal and
regulatory compliance costs," said Mr. Bell, who noted that these
have forced State Street to "spend more money on a variety of
things that in an ideal world we wouldn't."
Friday, Mr. Hooley said State Street had logged 1.71 percentage
points of positive operating leverage for 2013, compared with 2012.
For 2014, the bank expects positive operating leverage, although at
a lower level than last year's.
Assets under management at the end of the quarter rose 12%, to
$2.35 trillion from a year earlier, while assets under custody and
administration climbed 13%, to $27.43 trillion.
For 2014, State Street expects revenue to grow between 3% and
5%. Mr. Bell said he expects short-term and intermediate-term
interest rates to rise by the end of this year, a factor that would
benefit net interest revenue as well as the bank's
securities-lending business.
The bank estimates that, during the quarter, its excess deposits
were about $25 billion. Mr. Bell said he expects these to decline
in the first quarter and drop even further by the end of the year,
reducing average assets for 2014, if short-term rates rise.
State Street's earnings report follows rival Bank of New York
Mellon Corp.'s fourth-quarter results, which showed a 15% drop in
income that missed analyst expectations.
Anna Prior contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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