State Street Shares Slump as Results Miss Estimates -- 2nd Update


By Saabira Chaudhuri

State Street Corp. shares fell Friday as quarterly profit missed Wall Street analyst views and operating expenses climbed.

Shares sank as much as 8% in morning trading as the trust bank reported compensation expenses and "other expenses" jumped both from a year earlier and the prior quarter. On a call, State Street Chief Financial Officer Michael W. Bell said he expects "some upward pressure on regulatory compliance costs."

The Boston-based trust bank reported a profit of $545 million, or $1.22 a share, up from $468 million, or $1 a share, a year earlier. After stripping out one-time items, earnings rose to $1.15 from $1.11 a share. But analysts polled by Thomson Reuters had forecast earnings of $1.19 a share.

Although the bank logged a stronger performance in servicing fees, results in the business were affected by what Chief Executive Joseph L. Hooley said were "pretty negative" fixed income flows during the course of 2013, which " outstripped positive equity flows" in the second half of the year.

Servicing fees--easily the largest contributor to revenue--rose 7.1% from a year earlier and 1.7% from the third quarter to $1.23 billion.

In addition to weaker fixed-income markets, Mr. Hooley said "the emerging-markets pullback in the fourth quarter was also a little bit of a headwind" for servicing fees.

State street logged lower revenue from its trading-services arm--which includes foreign-exchange trading revenue and brokerage and other fees--which Mr. Bell attributed to lower foreign-exchange-trading revenue from lower market volatility.

Trading services fees fell 6.2% from a year earlier and 11% from the third quarter to $228 million.

"Our best assessment is that these results fall short of expectations given that fees missed," Citi analyst Josh Levin wrote in a research note following the earnings report.

Management fees rose 12% from a year earlier to $290 million, but processing fees and other revenue slumped 33% to $53 million.

Overall, State Street's operating revenue climbed 2.8% to $2.53 billion, modestly topping analyst estimates of $2.5 billion.

Operating expenses climbed 2.7% from the fourth quarter of 2012 and 4.3% from the prior quarter to $1.76 billion. The rise was driven partly by higher compensation and employee-benefits expense as well as occupancy costs.

Additionally, the company's so-called other expenses showed a 10% jump from the year earlier and a 16% rise from the third quarter to $292 million.

The rise in other expenses is a "key question I think in terms of the stock reaction today," said Jefferies analyst Ken Usdin. "Simply said the expenses were higher than expected."

On the call, Mr. Bell said other expenses "can bounce around quarter to quarter, because some of the costs in this category are pretty lumpy," but he said he doesn't think the fourth-quarter number is reflective of future costs.

"I'd say the big wild card really are the higher legal and regulatory compliance costs," said Mr. Bell, who noted that these have forced State Street to "spend more money on a variety of things that in an ideal world we wouldn't."

Friday Mr. Hooley said State Street had logged 171 basis points of positive operating leverage for 2013 compared with 2012. For 2014, the bank expects positive operating leverage, although at a lower level than last year's.

Assets under management at the end of the quarter rose 12% to $2.35 trillion from a year earlier, while assets under custody and administration climbed 13% to $27.43 trillion.

For 2014, State Street expects revenue to grow between 3% and 5%. Mr. Bell said he expects short-term and intermediate-term interest rates to rise by the end of this year, a factor that would benefit net interest revenue as well as the bank's securities lending business.

The bank estimates that, during the quarter, its excess deposits were about $25 billion. Mr. Bell said he expects these to decline in the first quarter and drop even further by the end of the year, reducing average assets for 2014, if short-term rates rise.

State Street's earnings report follows rival Bank of New York Mellon Corp.'s fourth-quarter results, which showed a 15% drop in income that missed analyst expectations.

Anna Prior contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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