State Street announced third-quarter 2011 earnings per share of $1.10, compared to $1.08 in the third quarter of 2010. Revenue of $2.427 billion in the third quarter of 2011 increased 5% from $2.310 billion in the third quarter of 2010. Third quarter revenue included net interest revenue of $46 million associated with discount accretion related to former conduit securities consolidated onto the company’s balance sheet in 2009, a discrete tax benefit of $91 million related to a restructuring of former non-US conduit assets and $85 million, attributable to acquisition and restructuring costs.
State Street’s servicing fees for the third quarter were $1.106 billion, up 10% on the third quarter of 2010. State Street said the increase was attributable primarily to net new business and the improvement in daily average equity valuations. However, servicing fees were down 2% from $1.124 billion in the second quarter of this year due primarily to declines in daily average equity valuations. The company said this decrease was offset partially by net new business installed. Total assets under custody and administration were $21.510 trillion at September 30, 2011, up 6% compared with $20.226 trillion at September 30, 2010 but down 5.5% from $22,762 trillion at June 20, 2011.
Trading services revenue, which includes foreign exchange trading revenue and brokerage and other fees, was $334 million for the third quarter of 2011, an increase of 46% from $228 million in the third quarter of 2010 and an increase of 7% from $311 million in the second quarter of this year. Foreign exchange trading revenue of $204 million increased 91% on the third quarter of 2010 and 21% on the second quarter of 2011 primarily due to higher volatility, as well as higher volumes in the case of the Q3 2010 comparison. Brokerage and other fees were $130 million, up about 7% due to stronger revenue from electronic trading. However, these fees were down 8% from the second quarter of 2011 due to lower revenue from transition management, offset partially by higher revenue from electronic trading.
Securities finance revenue was $85 million in the quarter, up 25% from $68 million in the third quarter of 2010, due primarily to improved spreads. However, this revenue was down 38% from $137 million in the second quarter of 2011 primarily due to seasonality in the second quarter. Processing fees and other revenue was $90 million, up 27% from $71 million in the third quarter of 2010 due to $22 million of gains related to real estate and certain leases. These fees were up 29% from the second quarter of 2011 to $90 million also due to $22 million of gains related to real estate and leases.
Jay Hooley, State Street’s CEO said in a press release: “Our third-quarter results demonstrate the resiliency of our business model as our operating-basis revenues increased from last year’s third quarter by about 12%, supported by prior period new business wins as well as stronger foreign exchange revenue. On an operating basis, we achieved positive operating leverage compared to the second quarter, reflecting effective expense control and expense savings from the business operations and information technology transformation program we launched last November.
At the weekend, Trian Fund Management, which owns about 3.3% of State Street, wrote a letter to the custodian banks board saying it was too focused on expansion and revenue at the expense of profitability and shareholder return. Trian also claimed that State Streets employee compensation scheme was too high.
In State Streets Q3 results press release, Hooley said Salaries and benefits expenses declined during the third quarter from the second quarter, as a result of reductions in incentive compensation and our success in executing this transformation program.”
Hooley continued: “In the third quarter we purchased approximately 5.8 million of our common shares which brought the total shares purchased in 2011 to 10.7 million, leaving about $225 million remaining to complete the previously announced share purchase program authorized by our Board of Directors in March. We ended the third quarter with a tier 1 common ratio of 16.0%. With our strong capital position, we believe we are well positioned as we formulate our 2012 capital plan to be submitted to the Federal Reserve early next year.”
Hooley concluded: “As we approach the end of 2011 and plan for 2012, we expect to face a prolonged, worldwide low interest-rate environment, constrained economic growth, anticipated higher capital requirements, and increased regulatory and compliance costs. We are addressing these challenges by remaining focused on our clients and growing our business, while controlling expenses with a goal of continuing to generate positive operating leverage.”
(JDC)