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State Street Suffers Q3 Trading Weakness but Revenue Rises From Year Earlier (Update 1)

  • Third-quarter EPS of $1.17, misses consensus estimate of $1.18
  • EPS rises from $1.01 a year earlier, on operating basis
  • Revenue of $2.43 billion misses estimate of $2.51 billion
  • Revenue up from $2.36 billion a year earlier
  • Assets under custody and management continue to grow

Updated from 8:53 a.m. ET with market reaction and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- State Street (STT - Get Report) on Tuesday reported a sequential revenue decline, as part of the industry's weak trading trend for the third quarter, but the asset manager and custody bank saw total revenue grow over 3% year-over-year.

State Street of Boston reported third-quarter net income available to common shareholders of $531 million, or $1.17 a share, declining from $571 million, or $1.24 a share, during the second quarter, and from $654 million, or $1.36 a share, during the third quarter of 2012.

The year-earlier results include an after-tax benefit of $166 million, or 35 cents a share, "the majority of which pertained to recoveries associated with the 2008 Lehman Brothers bankruptcy," according to State Street.

Third-quarter revenue totaled $2.469 billion, below the consensus estimate of $2.523 billion. Revenue declined from $2.580 billion in the second quarter, as trading services revenue dropped 13.5% to $256 million. Servicing fees were up 1% from the second quarter, to $1.211 billion. Securities finance revenue was down 43.5% sequentially to $74 million in the third quarter. The company also saw a 5% quarter-over-quarter decline in net interest income to $553 million.

The year-over-year revenue comparison was more favorable. Servicing fees grew 10% and management fees also grew 10% to $276 million in the third quarter (they were flat from the second quarter). Trading services revenue was up 10%. Securities finance revenue was down 19% year-over-year.

Processing fees and other revenue grew 3% quarter-over-quarter and 23% year-over-year, to $103 million in the third quarter.

Total operating expenses for the third quarter were $1.687 billion, down 4% from the second quarter and up 1% from a year earlier.

State Street CEO Joseph Hooley in the company's earnings release said the third-quarter results "reflect the strength of our core business with operating-basis fee revenue up 9% from the third quarter of 2012, in a period impacted by the cyclical declines in market-driven revenue from a summer slowdown as well as the effect of the low interest-rate environment."

He added that "Demand for our products, services, and solutions remains strong as evidenced by $200 billion of new asset servicing wins during the quarter."
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