State Street Fees Boost Bottom Line (Update 1)

Updated with early market action and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- State Street ( STT) of Boston on Friday announced a 15% year-over-year increase in operating earnings, which CEO Joseph Hooley said reflected "continued resilience across our asset servicing and asset management businesses."

On an operating basis, State Street reported fourth-quarter operating earnings available to common shareholders of $521 million, or $1.11 a share, beating the consensus estimate of a dollar a share, among analysts polled by Thomson Reuters.

Operating earnings grew from $473 million, or 99 cents a share, in the third quarter, and $454 million, or 93 cents a share, in the fourth quarter of 2011.

The company's shares were up 5% in early trading, to $52.85.

Fourth-quarter GAAP earnings available to common shareholders of $468 million, or a dollar a share, included acquisition and restricting costs totaling $139 million, "primarily related to severance and benefits costs for targeted staff reductions expected to be substantially completed during 2013," which is expected to result in 630 staff positions being eliminated.

Investment management fees -- again, on an operating basis -- grew 4% sequentially and 29% year-over-year, to $260 million in the fourth quarter, with the year-over-year increase "primarily due to stronger equity markets, net new business, and higher performance fees."

Trading services revenue totaled $260 million in the fourth quarter, increasing from $232 million in the third quarter, but declining from $273 million in the fourth quarter of 2011, "primarily due to weakness in foreign-exchange trading, partially offset by stronger brokerage and other fees."

Fourth-quarter processing fees (and other revenue) increased to a tax-adjusted $115 million, from $84 million the previous quarter and $60 million a year earlier, with the sequential increase mainly reflecting "higher revenue from joint ventures as well as a gain of $10 million from the sale of a Lehman Brothers-related asset," but also including "a tax-equivalent adjustment of $36 million related to tax credits generated by tax-advantaged investments." The year-over-year increase reflected a $25 million negative fair-value adjustment in the prior-year period, as well as the fourth-quarter 2012 tax-equivalent adjustment.

The company's tax-adjusted net interest revenue was $600 million in the fourth quarter, declining from $611 million in the third quarter, but increasing from $577 million a year earlier, increased to The net interest margin narrowed to 1.36% in the fourth quarter from 144% the previous quarter and 1.40% a year earlier. The year-over-year increase reflected an increase in earning assets.

Total assets were $222.6 billion as of Dec. 31, increasing by 3% from a year earlier. State Street's assets under custody or administration increased by 4% sequentially and 12% year-over-year, to $24.371 trillion as of Dec. 31. Assets under management grew by 1% from the third quarter and 13% year-over-year, to $2.089 trillion as of Dec 31.

State Street's shares closed at 50.38 Thursday, trading for 11.7 times the consensus 2013 EPS estimate of $4.30. The consensus 2014 EPS estimate is $4.90.

Based on a quarterly payout of 24 cents, the shares have a dividend yield of 1.91%.

The company repurchased 33.4 million shares during 2012 at an average price of $43.11, and said that it had about $360 million authorized for share repurchases through the end of the first quarter.

Jefferies analyst Ken Usdin said in a note following the earnings announcement that it was "difficult to derive core EPS given restated results and differing tax treatment, but at worst core EPS is $1.00, which is in line with consensus," and that "core fee momentum, step-up in cost saves and reiteration of net interest margin guidance for 2013 all bode well for STT's ability to achieve 2013 consensus of $4.30."

State Street's 2013 guidance calls for the net interest margin to range from 1.30% to 1.40%. The company also expects its expenses to decline by $220 million, with another $140 million decline in 2014.

Usdin rates State Street a "Hold," with a price target of $52.00.

Interested in more on State Street? See TheStreet Ratings' report card for this stock.

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

>Contact by Email.

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 TheStreet.com 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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