State Street reported net income of $356 million in the first quarter of 2014, a decrease from $545 million in the fourth quarter of 2013 and from $455 million in the first quarter of 2013.
Revenue of $2.49 billion increased from $2.46 billion in the fourth quarter of 2013 and from $2.44 billion in the first quarter of 2013.
New asset servicing mandates during the first quarter of 2014 totaled $189 billion. Thirty-eight percent of those new business wins came from outside of the U.S. Joseph Hooley, State Street’s chairman, president and chief executive officer says this included 25 new mandates in alternative investment servicing where the custodian bank sees additional opportunities for growth.
Securities finance revenue of $85 million in the first quarter of 2014 increased 11.8% from the fourth quarter of 2013, primarily due to higher spreads and volumes. Compared to the first quarter of 2013, securities finance revenue increased 9.0%, primarily due to new business in enhanced custody. Securities lending provided bright spots to overall revenues with on loan balances seeing a 9.6% increase sequentially, and 25% of securities lending revenue was driven by enhanced custody, said Hooley during an earnings call. State Street began investing in enhanced custody three years ago. This has been a good addition, particularly in Asia and Europe, he added.
Brokerage and other revenue was down $30 million versus the first quarter of 2013 due to lower gold fees and outflows out of gold. The custodian bank also saw lower transition management revenues and electronic exchange revenues.
Collateral transformation services have been ramping up slowly and its impact on income will gradually bleed in over time, said Hooley. State Street is seeing more traction in these services, indicative of derivatives clearing coming and the signing of customers to enhanced custody services. There will be a gradual enhancement of these services towards revenue over time, said Hooley.
Assets under custody and administration (AuC/A) in the first quarter of 2014 totaled $27.477 billion, compared to $27.427 billion in the fourth quarter of 2013, a 0.2% increase. AuC/A increased from $25,422 billion in the first quarter of 2013, an 8.1% increase year over year. During an earnings call, Hooley addressed an analyst question about the slight growth in AuC/A in the first quarter, sequentially, given that markets improved and AuC/A was expected to increase given State Street’s sensitivity towards equities. He said State Street had lost a customer, which had low revenues and a moderate level of assets under management and was acquired through its purchase of Investors Bank & Trust in 2006. They were doing middle office without custody, which is rare, he said. It was a simple middle office only construct with abnormally low revenue but that created the distortion, Hooley added. Over the last few quarters the customer agreed to internalize. Hooley added that State Street’s new wins were heavily weighted in the alternative space, including in private equity, and the bank expects new business growth from alternative categories.
State Street’s first-quarter 2014 results included pre-tax severance costs of $72 million related to staff reductions to realign State Street’s cost base “to support our goal of positive operating leverage for the full year while continuing to invest in growth opportunities and meet evolving regulatory requirements. We expect these staff reductions to generate pre-tax savings of approximately $40 million on an annualized basis in 2015,” says State Street.
In light of its Business Operations and Information Technology Transformation program State Street said incremental pre-tax expense savings for full-year 2014, including the first quarter, are expected to be approximately $130 million, with an accumulative goal of $550 million by the end of this year and $50 million in 2015.
State Street reduced 400 positions in the first quarter. It expects $22m savings in 2014 to come from staffing reductions, with the majority realized in the first half.
“We remain focused on our key priorities – increasing revenue, controlling expenses, investing in growth opportunities, and optimizing our capital structure to create long-term value,” says Hooley. State Street is targeting 3-5% revenue growth in 2014.
During the earnings call, Hooley added that State Street has a goal of maintaining positive operating leverage year over year and will continue to drive growth in the core business and invest in growth areas and target efficiencies.
On an operating basis, non-GAAP, servicing fees of $1.24 billion in the first quarter of 2014 increased 0.5% from the fourth quarter of 2013, primarily due to stronger global equity markets and net new business, partially offset by lower transaction-related revenue. Compared to the first quarter of 2013, servicing fees increased 5.4%, due to stronger global equity markets and net new business.
During the earnings call, Michael Bell, State Street’s chief financial officer said the outlook for other operating expenses is pressured by regulatory compliance costs. The bank will see significant upward pressure on those expenses relative to 2013, he said. The outlook will be “lumpy” because of legal expenses, compliance and securities processing costs, he said, adding that the first quarter roughly included “wild card” legal expenses and regulatory compliance costs.
State Street will continue to set as a goal for positive operating leverage in 2014 and 2015, said Bell. He said this will come through further targeting of low costs and innovation through value added services and continual investment. There will be help from securities lending spreads in the first and second quarter, mainly because of seasonal dividend arbitrage and market interest, he said.
Bell concluded that the revenue outlook will be better than what was reported in the first quarter but that that the bank would look harder at operating expenses if revenue growth continued at 3%.
Securities Lending Provides “Bright Spots” in State Street’s Q1 Revenue
State Street reported first quarter revenues of $2.49 billion, an increase from $2.46 billion in the fourth quarter of 2013 and from $2.44 billion in the first quarter of 2013.
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