State Street Beats as Most Revenue Items Increase (Update 1)

  • First-quarter net income to common shareholders of $443 million, or 96 cents a share
  • Earnings beat the consensus EPS estimate of 93 cents
  • Total revenue of $2.470 billion slightly below consensus estimate of $2.479 billion
  • Assets under custody, administration and management grow 3% sequentially and 10% year-over-year

Updated from 9:04 a.m. ET with late morning market action and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- State Street ( STT) of Boston on Friday reported a continued decline in net interest revenue -- more than offset by increases in servicing and management fees -- and trading revenue.

The institutional asset manager and investment services provider reported first-quarter net income available to common shareholders of $443 million, or 96 cents a share, declining from $521 million, or $1.11 a share, in the fourth quarter, but increasing from $410 million, or 84 cents a share, in the first quarter of 2012.

First-quarter revenue totaled $2.470 billion, increasing from $2.463 billion the previous quarter, and $2.421 billion a year earlier.

The first-quarter results came in ahead of the consensus estimates among analysts polled by Thomson Reuters, of a profit of 93 cents a share, on revenue of $2.479 billion.

The main factor in the sequential earnings decline was an increase in compensation expenses, which the company said was "due to the effect of the $118 million of equity incentive compensation for retirement-eligible employees and payroll taxes." Compensation expenses totaled $1.035 billion in the first quarter, compared to $915 million in the fourth quarter and $1.064 billion in the first quarter of 2012.

Most revenue trends were positive. Servicing fees were up 2% sequentially and 9% year-over-year, to $1.175 billion in the first quarter. Management fees totaled $263 million in the first quarter, rising 1% from the previous quarter, and 11% from a year earlier. First-quarter trading services revenue was up 16% sequentially and up slightly from a year earlier, to $281 million.

State Street's net interest revenue declined to $577 million in the first quarter from $600 million in the fourth quarter and $607 million in the first quarter of 2012. The sequential decline reflected the lower number of days in the first quarter. The year-over-year decline resulted from a narrowing of the net interest margin to 1.31% in the first quarter from 1.36% the previous quarter and 1.52% a year earlier.

State Street CEO Joseph L. Hooley said "the strength in the equity markets, combined with higher volumes and increased volatility in foreign-exchange trading, supported our fee revenue. We continue to control expenses across the organization and generate benefits from our transformation program."

"Overall, the environment continues to show signs of gradual improvement as reflected by investors shifting into equities. However, given the ongoing fragile state of the global markets, we continue to remain cautious for 2013," he said.

State Street reported a first-quarter return on average common equity of 9.1%, declining from 9.3% in the fourth quarter, but improving from 8.8% in the first quarter of 2012.

The company's estimated March 31 Basel III Tier 1 common equity ratio was 10.6%, declining from 10.8% in December.

State Street during the fourth quarter completed a common stock repurchase program, buying back $360 million worth of shares. The company in March announced a new $2.1 billion repurchase authorization, to run through the first quarter of 2014. Following the completion of the 2013 Federal Reserve stress tests, the company in March raised its quarterly dividend to 26 cents a share from 24 cents.

State Street's stock was down 0.5% in late morning trading, to $56.23.

Jefferies analyst Ken Usdin rates State Street a "buy," with a $66 price target, and in an early note to clients on Friday wrote that "While the result should support forward estimates, revenue growth (+0.3% Q-Q) was light vs. consensus (lower spread income, less growth in core fees)."

"Early investor feedback is cautious on the revenue growth rate," Usdin wrote, "but we think the result is best among trust banks."

When discussing the company's expense-control efforts, Usdin wrote that State Street's ratio of employee compensation to revenue of 41.9% in the first quarter "improved 200bp vs. 1Q12, which is a good sign that efficiency initiatives are taking hold."

State Street's shares closed at $56.51 Thursday, returning 21% year-to-date, following a 19% return during 2012. The shares trade for 11 times the consensus 2014 EPS estimate of $5.12. The 2013 EPS estimate is $4.49.

Based on the 26-cent quarterly payout, the shares have a dividend yield of 1.84%.

STT Chart STT data by YCharts

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

-- 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 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.