State Street Beats; Revenue Mixed

BOSTON ( TheStreet) -- State Street ( STT) reported third-quarter net income available to common shareholders of $543 million, or $1.10 a share, increasing from EPS of a dollar the previous quarter, and $1.08 a year earlier.

Excluding items related to "discount accretion related to former conduit securities consolidated onto the Company's balance sheet in 2009" and a tax benefit "related to a restructuring of former non-U.S. conduit assets" and acquisition restructuring costs, State Street said its third-quarter operating earnings were 96 cents a share, beating the consensus estimate of 88 cents among analysts polled by Thomson Reuters.

Operating earnings matched the previous quarter, but rose from 86 cents a share in the third quarter of 2010.

CEO Joseph Hooley said the year-over-year operating improvement reflected "prior period new business wins as well as stronger foreign exchange revenue," and that third-quarter expenses declined form the second quarter because of "expense savings from the business operations and information technology transformation program we launched last November," and "reductions in incentive compensation" for employees.

Hooley added that the company remained in a "strong capital position," ending "the third quarter with a tier 1 common ratio of 16.0%," after repurchasing "5.8 million of our common shares during the third quarter , which brought the total shares purchased in 2011 to 10.7 million, leaving about $225 million remaining to complete the previously announced share purchase program authorized by our Board of Directors in March."

Total revenue for the third quarter was $2.41 billion, declining from $2.47 billion the previous quarter, but rising 12% from $2.12 billion in the third quarter of 2010. Total expenses declined 2.5% quarter-over-quarter to $1.71 billion, but increase 12% year-over-year to $1.76 billion

State Street's second-quarter return on average common equity was 9.8%, declining from 10.2% in both the previous quarter and the third quarter of 2010.

Servicing fees saw a slightly quarter-over-quarter decline to $1.1 billion in the third quarter, but were up 10% year-over year, reflecting State Street's acquisition of the Bank of Ireland's assets management business. Trading services fees grew 7% quarter-over-quarter and 47% year-over-year to $334 million, mainly reflecting a 91% increase in foreign exchange revenue to $204 million, because of higher volatility.

Third-quarter net interest revenue was $578 million, up slightly from $572 million in the second quarter, but down from $724 million a year earlier. State Street's net interest margin -- the difference between the bank's average yield on loans and investments and its average cost of funds -- continued to decline, to 1.56% in the third quarter, from 1.76% in the second quarter and 2.36% in the third-quarter of 2010.

State Street's shares were down 26% year-to-date through Monday's close at $33.87, compared to a 31% decline for the KBW Bank Index ( I:BKX).

Based on a quarterly payout of 18 cents, the shares have a dividend yield of 2.13%.

Sentiment among analysts is strong, with 14 out of 19 analysts covering State Street rating the shares a buy. The other analysts have neutral ratings. A median price target of $47 among analysts polled by Thomson Reuters implies 39% upside for the shares.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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