State Street Shares Fall as Bank Braces for Tougher Rate Environment -- Update
April 23 2019 - 3:36PM
Dow Jones News
By Allison Prang
Shares of State Street Corp. dropped more than 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 6.3% 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.
State Street is responding to the cyclical challenges the
industry has faced by cutting costs, Mr. O'Hanley said in an
interview. Earlier this year, the company announced plans to cut
$350 million in costs in 2019. In the first quarter, expenses at
State Street rose 1.1% over the comparable quarter a year
earlier.
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 15:21 ET (19:21 GMT)
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