State Street Corporation (STT) reported first quarter operating earnings of 75 cents, in line with the Zacks Consensus Estimate. However, the results were down from the prior-year quarter’s earnings of $1.04 per share.
Operating results, however, basically exclude the net interest revenue associated with the discount accretion from the consolidation of the asset-backed commercial paper conduits in the second quarter of 2009.
On a GAAP basis, earnings for the quarter came in at 99 cents per share, compared with earnings of $1.02 in the year-ago quarter, primarily due to increase in outstanding shares.
State Street reported an increase in revenues in the quarter. Its assets under management posted modest growth. The company also experienced a reduction in unrealized loss position in the quarter. However, expenses were significantly higher than the prior-year period.
Revenue for the quarter increased 1% sequentially and 15% year-over-year to $2.3 billion. Operating revenue for the quarter was $2.1 billion, up 2% sequentially and 4% year-over-year.
Net interest revenue on an operating basis decreased 4% sequentially and 18% year-over-year to $481 million. The decrease was primarily due to the impact of the continuing low interest-rate environment, coupled with compression in LIBOR spreads. Net interest margin on an operating basis was 162 basis points in the quarter.
Expenses on an operating basis increased 0.6% sequentially and 21.7% year-over-year to $1.6 billion, primarily reflecting increases in salaries and benefits expenses.
The company reported an 8% increase in fee revenue compared to the prior-year first quarter. Unrealized losses decreased to $1.4 billion from $2.3 billion in the prior quarter and $5.8 billion in the year-ago quarter.
Total assets under custody and administration were $19.04 trillion as of March 31, 2010, up 1.3% sequentially and 26.6% year-over-year. Total assets under management as of March 31, 2010 were $1.9 trillion, up 0.9% sequentially and 38.3% year-over-year.
State Street’s regulatory capital ratios continue to be strong as of March 31, 2010, with the company’s Tier 1 capital ratio at 18.1% (up 40 bps sequentially) and its leverage ratio at 9.0% (up 50 bps sequentially).
Though the results were in line with expectations, the market seems to discount the earnings results as the revenue growth was not as expected. While the stock market experienced a significant appreciation in the first quarter, the growth in assets under management at the company was relatively low. Additionally, servicing fees were down sequentially and net customer cash flows were modestly negative.
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