State Street Surpasses Estimates - Analyst Blog

State Street Corporation's (STT) fourth quarter 2010 operating earnings of 87 cents per share were ahead of the Zacks Consensus Estimate of 85 cents. The results also compare favorably with the prior quarter earnings of 86 cents and the prior-year quarter earnings of 71 cents.

For the fiscal year 2010, operating earnings of $3.40 per share were ahead of the Zacks Consensus Estimate of $3.39 and the prior year earnings of $3.32.

Operating results, however, exclude certain discount accretion related to former conduit assets, losses related to a restructuring of the investment portfolio, restructuring charges related to a business operations and information technology enhancements program, merger and integration costs and a tax on bonus payments to employees in the United Kingdom.

On a GAAP basis, earnings for the quarter came in at 16 cents per share, compared with earnings of $1.08 in the prior quarter and $1.00 in the year-ago quarter.  For the full year, earnings on a GAAP basis stood at $3.09 per share, compared with earnings of $3.46 per share in the prior year.

The improvement in results was aided primarily by increased operating revenues, which were offset partly by higher expenses. The company's capital ratios also showed improvement. Also, with the acquisition of Intesa and Mourant in the second quarter State Street's core asset servicing business strengthened further, thus supporting the top line.

Quarter in Detail

State Street reported revenues of $2.04 billion in the quarter, down 12% sequentially and 10% year over year. Operating revenues of $2.28 billion rose 5.9% from $2.15 billion in the prior quarter and 9.6% from $2.08 billion in the year-ago quarter. The company's operating revenues were also ahead of the Zacks Consensus Estimate of $2.18 billion.

For the full year, State Street reported revenues of $8.95 billion, up 4% year over year. Operating revenues of $8.71 billion increased 7.1% from $8.14 billion in 2009. However, the company's operating revenues missed the Zacks Consensus Estimate of $8.85 billion.

For the reported quarter, net interest revenues on an operating basis fell 3.2% sequentially but increased 10.2% year over year to $550 million. This increase was attributable to the impact of deposits added in connection with the Intesa acquisition and a slight improvement in funding costs. Net interest margin on an operating basis was 1.65% in the quarter, up 4 basis points (bps) year over year.

Net interest revenues on an operating basis for the fiscal year 2010 stood at $2.12 billion, up 2.6% from $2.06 billion in the prior year.

In the reported quarter, State Street reported a 10.6% growth in fee revenues compared with the prior quarter and 13.7% from the prior-year quarter to $1.74 billion. Unrealized losses in the investment portfolio increased to $504 million from $281 million in the prior quarter but fell from $2.29 billion in the year-ago quarter.

Expenses on an operating basis inched up 7.0% sequentially and 4.4% year over year to $1.62 billion in the quarter. The year-over-year hike in expenses was mainly due to higher salaries and employee benefits expenses, information systems and communications expenses and transaction processing services expenses, which were partly offset by a lower level of other expenses. For the full year 2010, expenses on an operating basis stood at $6.18 billion compared with $5.67 billion in 2009.

Total assets under custody and administration were $21.57 trillion as of December 31, 2010, up 14.5% year over year. Total assets under management as of December 31, 2010 totaled $2.01 trillion, up 3.0% year over year.

Profitability Ratios

The capital ratios continue to remain strong. As of December 31, 2010, State Street's Tier 1 capital ratio was 20.5%, up from 15.8% as of September 30, 2010 and 17.7% as of December 31, 2009. Similarly, Tier 1 common ratio improved to 18.1% as of December 31, 2010 from 13.9% as of September 30, 2010 and 15.6% as of December 30, 2009.

For the reported quarter, return on common equity (on an operating basis) came in at 9.8%, compared with 10.2% in the prior quarter and 9.9% in the prior-year quarter.

Our Take

Though we are concerned about State Street's risky investment portfolio exposure, we believe that the recent realignment of its investment portfolio, various restructuring programs, strong capital ratios along with well-off core servicing and investment management franchises will help the company offset the financial weakness caused by the sluggish economic recovery, thereby providing buoyancy to growth in the near to mid term.

State Street's close competitors Bank of America Corporation (BAC) and BB & T Corp. (BBT) are scheduled to release their fourth quarter 2010 earnings on January 21.

State Street currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold' rating. Also, considering the fundamentals, we are maintaining our long-term ‘Neutral' recommendation on the shares.

 
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