State Street Profit Drops 22% on Severance CostsChristopher Condon
State Street Corp., the third-largest custody bank, said first-quarter profit fell 22 percent, reduced mostly by severance costs related to the company’s fourth round of job cuts since 2010.
Net income decreased to $356 million, or 81 cents a share, from $455 million, or 98 cents, a year earlier, the Boston-based company said today in a statement. Earnings included $72 million in pretax severance expenses. Excluding some costs, State Street’s operating basis net income was 99 cents a share, compared with the $1 a share estimate of 20 analysts surveyed by Bloomberg.
“The environment for the custody banks is continuing to take out revenue and they just can’t really continue to wait on interest rates to go higher,” Marty Mosby, an analyst with Guggenheim Securities LLC in Hernando, Mississippi, said in a telephone interview. “State Street started this process about a year ahead of everyone else, and so they got to the end of their previous initiatives ahead of the others.”
State Street has relied over the past three years on a combination of cost cutting and global equity-market gains to overcome the negative impact of low interest rates. In three rounds of cuts from November 2010 to January 2013, the company eliminated about 2,900 staff. State Street didn’t say in the statement how many additional jobs were slashed in connection to the first-quarter severance costs.
The U.S. Federal Reserve has held its benchmark interest rate at zero to 0.25 percent since December 2008 in an attempt to stimulate borrowing and economic growth. Low rates hurt the ability of custody banks to earn money on lending and investing activities.
The Standard & Poor’s 500 Index of large U.S. stocks advanced 1.3 percent during the quarter and jumped 19 percent in the year ended March 31.
That helped boost assets under custody by 13 percent from a year earlier, and by 2.9 percent in the quarter, to $21 trillion. The amount of money State Street invests for clients rose 9.4 percent from a year earlier, and by 1.5 percent in the quarter, to $2.38 trillion.
Higher assets helped lift revenue 2 percent to $2.49 billion. The increase was held back by a drop in trading services revenue. Expenses increased 11 percent to $2.03 billion from a year earlier, driven largely by the severance costs. Net interest revenue declined 3.6 percent to $555 million.
State Street said in March it planned to increase its quarterly dividend to 30 cents a share from 26 cents after the Fed approved its capital plan for 2014. The company also said it would reduce its stock buybacks in the year through March 2015 to $1.7 billion from $2.1 billion in the previous 12 months.
Bank of New York Mellon Corp., the world’s largest custody bank, said on April 22 its first-quarter profit was $661 million, after a $266 million loss a year earlier. Chicago-based Northern Trust, the third-largest independent custody bank, said on April 15 its net income for the period increased 11 percent from a year earlier.
State Street reported results before the start of regular U.S. trading. State Street’s shares slumped 10 percent this year through yesterday, the most among the three biggest U.S. custody banks. BNY Mellon declined 3.8 percent this year and Northern Trust fell 2.7 percent.
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.
(State Street is scheduled to hold a conference call for investors at 9:30 a.m. New York time. The call can be accessed at http://www.statestreet.com/stockholder and by telephone at +1-888-391-4233 inside the U.S. and elsewhere at +1-706-679-5594 (Conference ID # 18206022).)