STT State Street Corporation

By Allison Prang 

Shares of State Street Corp. dropped 4% Tuesday following the release of its first-quarter results, another sign of the pressure facing certain banks as long-term interest rates soften.

Net interest income -- which made up 23% of State Street's first-quarter revenue -- rose 4.7% compared with the first quarter a year prior and fell 3.4% compared with the fourth quarter. However, average total deposits fell 5.9% from the prior year. The net interest margin tightened by a basis point from the prior quarter.

Chief Financial Officer Eric Aboaf said State Street expects net interest income to fall between 1% and 2% in the current quarter as a result of expectations for the yield curve and more noninterest-bearing deposits moving to interest-bearing products.

Shares of State Street have risen 6.4% year to date.

Revenue at custody banks -- like the broader banking industry -- is being hurt by the yield curve, which inverted last month. The Federal Reserve signaled earlier this year it has stopped raising interest rates for now, which caused the yield on the benchmark 10-year Treasury to drop to its lowest level in more than a year.

An inverted yield curve, which is seen as an indicator of a future recession, happens when short-term yields are higher than long-term yields.

"We're optimistic we can work through this period of interest rates, but it's clearly a bit different than what we expected at the turn of the year," Mr. Aboaf told analysts.

Investors' reaction to State Street's results was tempered compared with how they responded to a fellow custody bank, Bank of New York Mellon Corp. when it reported earnings last week. After reporting both profit and revenue that missed analysts' estimates, shares of the company fell almost 10%.

Overall, State Street's revenue fell 4.1%, to $2.93 billion in the first quarter, as fee income declined 6.4%. Analysts were expecting $2.92 billion in revenue.

Servicing fees, the largest contributor to revenue for the custody bank, fell 12%. The company attributed the drop to fee concessions, less activity and flows, a weaker equity market and a previously announced client move.

Total assets under custody and total assets under custody and/or administration fell 1.9%. Total assets under management rose 2.8%.

"Our results reflect challenging industry conditions," Chief Executive Ronald O'Hanley told analysts on State Street's earnings call, citing continued pricing pressure and industry flows that have been down compared with recent years.

Mr. Aboaf also said investors are moving away from costlier products and that trend also hurt revenue.

"There's just a shift in the market that's playing through and our view is we've got you complete in both, that new low-cost area and also the higher fee area," he said.

State Street said its first-quarter earnings were $508 million, which was a 23% decrease from the comparable quarter a year prior. The company reported earnings of $1.18 a share, down from $1.62 a share. Analysts polled by Refinitiv were expecting $1.17 a share.

The company said adjusted earnings were $1.24 a share. Analysts were expecting $1.19 a share.

Write to Allison Prang at allison.prang@wsj.com

(END) Dow Jones Newswires

April 23, 2019 12:42 ET (16:42 GMT)

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