State Street Corp.
) reported fourth-quarter operating earnings of $1.15 per share,
missing the Zacks Consensus Estimate of $1.19 owing to higher
non-interest expenses. However, the reported figure was up 3.6%
from the prior-year quarter figure of $1.11.
Lower-than-expected results were due to a marginal fall in net
interest income and higher-than-expected operating expenses,
partially offset by growth in fee income. Further, deteriorating
capital ratios was a dampener. However, improvement in asset
position and profitability ratios were tailwinds.
After considering certain non-recurring items, net income
applicable to common shareholders was $545 million, up 16.5% year
For full-year 2013, operating earnings per share increased 14.9%
year over year to $4.54. This, however, missed the Zacks
Consensus Estimate of $4.59.
Performance in Detail
Revenues on an operating basis came in at $2.53 billion, up 2.6%
from the prior-year quarter. Further, it beat the Zacks Consensus
Estimate of $2.50 billion.
Net interest revenue on an operating basis dropped 0.7% from the
previous-year quarter to $596 million. The fall was mainly due to
lower yields on earning assets, partly offset by lower yields on
interest bearing liabilities. Likewise, net interest margin was
1.30% in the quarter, down 6 basis points year over year.
Fee revenues came in at $1.93 billion, increasing 4.9% from the
prior-year quarter. The rise was attributable to increase in
servicing fees, management fees and securities finance fees,
partially offset by fall in processing and other revenues as well
as total trading services revenues.
On an operating basis, non-interest expenses increased 2.7% from
the year-ago quarter to $1.76 billion. The increase was primarily
driven by rise in compensation and employee benefits expenses as
well as other expenses, which were partly offset by lower
information systems and transaction processing service costs.
Total assets under custody and administration were $27.43
trillion as of Dec 31, 2013, up 12.5% year over year. Moreover,
assets under management were $2.35 trillion, up 12.4% from the
Capital and Profitability Ratios
State Street's capital ratios deteriorated, while profitability
ratio improved. As of Dec 31, 2013, Tier 1 capital ratio was
17.3%, down from 19.1% as of Dec 31, 2012. Likewise, Tier 1
common to risk-weighted assets decreased to 15.5% as of Dec 31,
2013 from 17.1% as of Dec 31, 2012.
Further, under Jul 2013 Basel III final rule (Advanced approach),
the estimated Tier 1 common ratio was 11.8% as of Dec 31, 2013.
Return on common equity (on an operating basis) came in at 10.3%,
flat year over year.
During the reported quarter, State Street repurchased shares
worth $560 million at an average price of $69.98 per share. This
was part of the company's buyback plan authorizing purchase of up
to $2.1 billion worth of stock through Mar 13, 2014. As of Dec
31, 2013, the company had nearly $420 million remaining under
stock repurchase program.
During 2013, the company brought back nearly 31.2 million shares
at a total cost of roughly $2.04 billion at an average price of
$65.30 per share.
In 2014, management anticipates revenue to grow in the range of
3%-5% year over year. Moreover, the company expects to
generate an incremental $130 million in total pre-tax expense
savings from the Business Operations and IT Transformation
program. Further, effective tax rate will likely remain unchanged
from the 2013 level.
In first-quarter 2014, compensation and employee benefits expense
related to retirement-eligible employees and payroll taxes are
expected to increase from the year-ago quarter. Notably,
incremental amount attributed to equity compensation for
retirement-eligible employees and payroll taxes is expected to be
nearly $150 million.
Performance of Other Major Regional Banks
SunTrust Banks, Inc.
) outpaced the Zacks Consensus Estimate. The results benefited
from prudent expense management and lower provision, partially
offset by a fall in the top line.
We anticipate State Street's restructuring programs, along with
stable core servicing and investment management franchises to
help offset its financial weakness. In addition, the recent
acquisitions will drive revenues further.
Moreover, enhanced capital deployment initiatives reinforce the
company's priority to enhance shareholders' value. However, a low
interest rate environment and declining net interest revenues are
expected to hamper State Street's top line in the coming
Currently, State Street carries a Zacks Rank #3 (Hold).
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