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) 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."

The company repurchased $560 million in common shares during the third quarter, and has about $1.0 billion in shares authorized for repurchase through the first quarter of 2014.

State Street's shares closed at $69.81 Monday, returning 50% this year. The shares trade for 13.3 times the consensus 2014 EPS estimate of $13.27.

The shares were down nearly 3% in morning trading Tuesday, to $67.82.

The potential for negative earnings estimate revisions for subsequent quarters "appears modest with more help coming from efficiency initiatives/capital return and a more stable spread income run rate for 4Q," according to Jefferies analyst Ken Usdin, who rates State Street a "buy," with an $82 price target.

In a client note Tuesday morning, Usdin wrote that he suspected "light activity levels over the summer weighed on servicing, while asset management likely incurred higher money market fee waivers and possibly lower performance fees."

STT Chart STT data by YCharts

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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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