State Street Profit Rises 16% on Global Equities Rally

State Street Corp. (STT), the third-largest custody bank, said second-quarter profit climbed 16 percent as rising global equity markets lifted the value of the assets it oversees.

Net income on an operating basis increased to $571 million, or $1.24 a share, from $494 million, or $1.01, a year earlier, the Boston-based company said today in a statement. Excluding certain items, 22 analysts surveyed by Bloomberg expected earnings of $1.18 a share on average.

State Street, led by Chief Executive Officer Joseph L. Hooley, has led a rally among the three largest independent U.S. custody banks, gaining 49 percent this year through yesterday amid aggressive efforts over the past two years to cut costs and return capital to shareholders. State Street raised its dividend twice in the past 16 months and increased the size of its share repurchase program in March.

“It was a good quarter and I think it’s pretty impressive what State Street has been able to do in terms of expense control and capital management,” James Shanahan, an equity analyst at Edward Jones & Co. in St. Louis, said in a telephone interview.

State Street declined 1.2 percent to $69.28 at 4:15 p.m. in New York trading, while the Standard & Poor’s 500 Index (SPX) and the S&P index of custody banks and asset managers both gained 0.2 percent.

Hooley said investor confidence has improved, even though he expects “choppiness” in stock markets relating to how the Federal Reserve signals and draws back on monetary stimulus.

Markets Healing

“I feel as good as I’ve felt at any point post-crisis,” Hooley said in a telephone interview. “The world is healing and developed markets, most notably the U.S., are getting back on their feet.”

Assets under custody increased 15 percent from a year earlier to $18.9 trillion, and the amount of money State Street invests for clients rose 12 percent to $2.15 trillion. The S&P 500 Index of U.S. stocks rose 18 percent in the 12 months ended June 30, and global stocks, as measured by the MSCI ACWI Index, advanced 14 percent.

New business added $201 billion to custody assets and $11 billion to investing assets, excluding the SPDR Gold Trust (GLD) ETF, during the three months ended June 30. Assets in SPDR Gold Trust plunged by about $25 billion in the quarter amid a global gold selloff.

Fees, Expenses

Fees for overseeing custody and investing assets rose 11 percent, helping to increase operating revenue by 4.9 percent to $2.58 billion. Net interest revenue, hurt by low interest rates, declined 7.5 percent to $582 million.

Expenses climbed 1.4 percent to $1.75 billion and compensation and benefits dropped by 2.7 percent from a year earlier, the company said in the statement.

State Street repurchased $560 million of common stock in the quarter at an average price of $65.73. The company declared a quarterly dividend of 26 cents a share.

“Right now I’m pretty comfortable and confident that the best way to deploy excess capital is to buy back shares and maintain the dividend.” Hooley said.

The company resolved its search for a chief financial officer in June, naming Michael W. Bell, former CFO at Toronto-based insurer Manulife Financial Corp. (MFC), to replace Edward Resch, who plans to retire in August.

Custody Banks

Bank of New York Mellon Corp., the world’s largest custody bank, said July 17 its second-quarter profit rose 79 percent to $833 million, or 71 cents a share, a year after costs from a legal settlement hurt earnings.

Northern Trust Corp. (NTRS), based in Chicago, said July 17 its net income climbed 6.2 percent to $187.9 million, or 78 cents a share.

The company’s operating profit excludes money earned from the sale or maturing of bonds whose value was written down in May 2009, which the company records as “discount accretion” within net interest income.

Net income based on generally accepted accounting principles, or GAAP, increased 19 percent to $571 million, or $1.24 a share, from $480 million, or 98 cents a share, a year earlier.

Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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