We maintain our long-term Neutral recommendation on State Street Corp. ( STT">STT ) after reviewing the company's third-quarter results, which were substantially ahead of theZacks Consensus Estimate. The company's stable capital position, ability to boost shareholders value and restructuring initiatives undertaken to improve bottom line are expected to offset the weakness caused by the sluggish economic recovery.
However, given the ongoing weakness in the mortgage market, we remain concerned about the sizable amount of mortgage-backed and asset-backed securities in the company's investment portfolio.
In order to enhance efficiency and improve its bottom line, State Street had unveiled a cost reduction program back in 2010. Since then, the company has been trying to lower its expenses by trimming down the workforce and consolidating its real estate portfolio.
As of September 30, 2011, the company terminated the services of nearly 1,260 employees and incurred $231 million as expenses related to restructuring initiatives. Currently, State Street is on track to achieve annual pre-tax savings of about $450 million by 2014.
Additionally, State Street has been enhancing investors' value over the last few quarters. In March 2011, the company hiked its quarterly dividend to 18 cents. This was the company's first rise in dividend since mid-2007. Further, the company also authorized $675 million for its stock repurchase program.
Hence, as of September 30, 2011, State Street bought back 10.7 million shares for a total of $450 million. However, this is unlike its peer SunTrust Banks Inc. ( STI">STI ), which has not repurchased any of its common stock for the first nine months of 2011.
State Street has been growing organically as well as through some international acquisitions. The company anticipates non-U.S. growth to drive total revenue as overseas markets are more fragmented and yet to mature.
On the flip side, State Street's profitability is likely to be affected by the Federal Reserve's decision to mandate additional surcharge for the large U.S. banks (with assets of $50 billion or more) for meeting the Basel III requirements.
Also, the current economic turmoil in the Euro-zone and the rating downgrades by various rating agencies could create an adverse impact on State Street's financials. As of September 30, 2011, the company did not have sovereign debt exposure in stressed European countries, though aggregate exposure stood at $2.44 billion to Greece, Ireland, Italy, Portugal and Spain.
State Street currently retains itsZacks #3 Rank, which translates into a short-term Hold rating.