State Street Corporation’s (STT) third quarter 2010 operating earnings of 86 cents per share were ahead of the Zacks Consensus Estimate of 83 cents. However, the results deteriorated 7.5% from 93 cents in the prior quarter though they improved 21.1% from 71 cents in the prior-year quarter.
Operating results, however, exclude certain discount accretion related to former conduit assets, 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 $1.08 per share, compared with earnings of 87 cents in the prior quarter and 66 cents in the year-ago quarter.
The year-over-year improvement in results was aided mainly by increased operating revenues, which were offset partly by higher expenses. Also, acquisition of Intesa and Mourant in the second quarter further reinforced State Street’s core asset servicing business, thus supporting the top line.
Quarter in Detail
State Street reported revenues of $2.31 billion, up 0.4% sequentially and 3.6% year over year. Operating revenues of $2.2 billion fell 0.4% from $2.1 billion in the prior quarter but increased 8.4% from $2.0 billion in the year-ago quarter. The company’s revenues were ahead of the Zacks Consensus Estimate of $2.20 billion.
Net interest revenues on an operating basis spiked up 9.9% sequentially and 19.6% year over year to $568 million. This increase was attributable to the impact of deposits added in connection with the Intesa acquisition, a slight decline in funding costs and higher yields and volumes in the investment portfolio. Net interest margin on an operating basis was 1.77% in the quarter, up 21 basis points (bps) year over year.
State Street reported a 5.9% decrease in fee revenues compared with the prior quarter but increased 6.7% from prior-year quarter to $1.6 billion. Unrealized losses in the investment portfolio declined to $281 million from $994 million in the prior quarter and $3.0 billion in the year-ago quarter.
Expenses on an operating basis inched up 3.4% sequentially and 3.1% year over year to $1.5 billion. The hike in expenses was mainly due to higher salaries and employee benefits expenses, which was partly offset by a lower level of other expenses.
Total assets under custody and administration were $20.22 trillion as of September 30, 2010, up 6.3% sequentially and 12.8% year over year. Total assets under management as of September 30, 2010 were $1.9 trillion, up 6.8% sequentially and 9.7% year over year.
Profitability Ratios
The capital ratios continue to remain strong and improved both sequentially and year over year. As of September 30, 2010, State Street’s Tier 1 capital ratio was 15.8% (up 70 bps sequentially and 50 bps) and its leverage ratio was 8.3% (up 50 bps sequentially and 30 bps).
Return on common equity, on an operating basis, came in at 10.2%, compared with 11.8% in the prior quarter and 11.0% in the prior-year quarter.
Our Take
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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