State Street Corp., the third-largest custody bank, said global financial markets remain fragile even as rising equity markets helped first-quarter profit increase 8 percent.
“The environment continues to show signs of gradual improvement as reflected by investors shifting into equities,” Chief Executive Officer Joseph L. Hooley said on a conference call with investors and analysts today. “However, given the ongoing fragile state of the global markets, we continue to remain cautious for 2013.”
Hooley said clients “moderated” risk-taking during the first quarter after starting the year with a stronger appetite for risk. The firm, under pressure from some large investors, has worked to reduce costs and return excess capital to shareholders over the past two years as record-low interest rates and economic uncertainty weighed on earnings.
Net income on an operating basis increased to $443 million, or 96 cents a share, in the first quarter from $410 million, or 84 cents, a year earlier, the Boston-based company said. Earnings beat the 93-cent average estimate of 23 analysts surveyed by Bloomberg.
State Street rose 0.7 percent to close at $56.93 in New York, after earlier falling as much as 3.4 percent. The shares advanced 21 percent this year, best among the three largest U.S. independent custody banks. The Standard & Poor’s 20-company index of asset managers and custody banks gained 14 percent.
Hooley’s comments echo remarks from Blackstone Group LP President Tony James, who said a lackluster economy may curtail investing. Blackstone, the world’s largest private-equity firm, yesterday reported a 28 percent increase in first-quarter economic net income.
“Growth in the U.S. economy is anemic” and “Europe is flat to down,” James said on a conference call yesterday discussing the results. Debt markets, which helped fuel a resurgence in large leveraged buyouts, are at “some kind of peak.”
State Street’s assets under custody and administration rose 9.5 percent from a year ago to $25.4 trillion, and the money it manages for investors increased 9.9 percent to $2.18 trillion, helped by the 11 percent gain by the Standard & Poor’s 500 Index of U.S. stocks in the year ended March 31.
Operating revenue rose 2 percent to $2.47 billion. Net interest revenue, earned for investing client deposits, fell 4.9 percent to $577 million in the quarter.
State Street cut 630 jobs in January, the third round of firings in two years, raised its quarterly dividend by 2 cents to 26 cents a share in February and stepped up its planned share repurchase program in March. State Street plans to repurchase $2.1 billion of its own shares in the year ending March 31, 2014, up 17 percent from the previous year. The company announced the move in March after it passed the U.S. Federal Reserve’s stress tests for financial strength and received approval for its 2013 capital plan.
Hooley said the firm continues to “prioritize” the return of capital to shareholders through buybacks and dividend increases.
Investor Nelson Peltz’s Trian Fund Management LP admonished State Street’s board over poor performance in an October 2011 letter and urged directors to make a clearer commitment to cost-cutting, prioritize the return of capital to shareholders over acquisitions and consider selling off the bank’s asset-management unit.
Bank of New York Mellon Corp., the world’s largest custody bank, said April 17 it had a net loss of $266 million in the first quarter after the U.S. Tax Court disallowed certain foreign tax credits. Income excluding the tax cost was $588 million, or 50 cents a share, compared with $619 million, or 52 cents, a year earlier.
Northern Trust Corp., based in Chicago, said April 16 its first-quarter net income rose 1.7 percent to $164 million, or 67 cents a share.
State Street’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.
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.