State Street In Restructuring Mode - Analyst Blog

On Tuesday, State Street Corp. (STT) announced a number of restructuring programs aimed improving efficiency to boost its bottom line. The plan begins immediately and consists of targeted cost initiatives and operational and information technology enhancements through the reduction of both workforce and occupancy costs.

Beginning in the fourth quarter of 2010, State Street anticipates restructuring costs of about $160–$165 million. In total, the company expects to incur nearly $400–$450 million of restructuring costs by the end of 2014. These costs will be mainly related to the elimination of approximately 1,400 jobs (5% of the total workforce) and the consolidation of real estate portfolio.

As a result of the fourth quarter actions and other initiatives, State Street expects that excluding restructuring expenses incurred in the fourth quarter, benefits will offset the incremental costs of these actions in 2011. This could also lead to a pre-tax cost saving in 2011 related with the restructuring plan. The company also anticipates annual pre-tax savings of approximately $575–$625 million by 2014.

State Street announced that job cuts will be executed starting December 2010 and will be subsequently completed by the end of 2011. The company will provide appropriate separation packages including outplacement services for the retrenched employees. The company will also implement lease terminations, early buy-outs or certain sublease arrangements to reduce occupancy costs which had grown substantially over the years due to acquisitions.

This is not the first time that State Street has planned to cut jobs. In the first quarter of 2009, the company had slashed about 1,700 jobs and reduced its quarterly dividend from 24 cents per share to a penny to improve its capital base.

Over the years, State Street has expanded through organic and inorganic growth. The company completed two major acquisitions – Intesa Sanpaolo's Securities Services and Mourant International Finance Administration – in 2010. In October 2010, the company also announced its plan to acquire Bank of Ireland Asset Management (BIAM). The company also aims to double its non-US revenues by 2014.

State Street's management is confident that this multi-year program will help the company in continuing its industry leadership in service to clients, innovation and operational excellence.

State Street's plan to reduce costs may also put pressure on its peers – Bank of New York Mellon Corporation (BK) and Northern Trust Corporation (NTRS) – to trim expenses.

In the third quarter of 2010, State Street had reported a profit of 86 cents per share compared with 71 cents in the year-ago quarter. The year-over-year improvement in results was aided mainly by increased operating revenues (up 8.4%), which were offset partly by higher expenses (up 3.1%). Also, the acquisition of Intesa and Mourant in the second quarter further reinforced State Street's core asset servicing business, thus supporting the top line.

Though we are concerned about State Street's risky investment portfolio, we believe strong regulatory capital ratios along with well-off core servicing and investment management franchises will help it to offset the volatility caused by the global economic turmoil, thereby providing buoyancy to growth in the longer term.

State Street currently retains a Zacks #3 Rank, which translates into a short-term “Hold” rating, indicating no directional pressure on the shares over the near term. Also, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the shares.

 
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