UPDATE 2-State Street shares drop amid cost concerns

Fri Jan 24, 2014 12:57pm EST

By Ross Kerber and Tanya Agrawal

Jan 24 (Reuters) - Shares in State Street Corp fell on Friday after the world's second-largest standalone custody bank reported operating results below expectations and said it could face rising regulatory costs.

State Street of Boston reported solid fourth-quarter results in some areas like its asset-servicing business, driving net income for the period to $545 million, or $1.22 per share, from $468 million, or $1.00 per share, a year earlier.

But shares were down 4.1 percent in midday trading to $69.78, lower than rival BNY Mellon Corp, whose shares were down 2 percent at $32.44.

Excluding items like a tax benefit, State Street reported earnings of $514 million, or $1.15 per share, on an operating basis.

Analysts, on average, had expected a profit of $1.19 per share, according to Thomson Reuters I/B/E/S. Several said they regarded the operating result as an earnings miss.

Expenses seemed high since State Street had emphasized cost-cutting efforts in the past via layoffs and a revamp of its IT strategy, said Evercore Partners analyst Andrew Marquardt.

The overall results were "a disappointment, given that expense has been a key area for State Street for a long time," Marquardt said.

He noted company executives declined to provide some details about the expenses to analysts during a conference call on Friday, saying further information would be given at a meeting scheduled for February.

"'Wait until analyst day' is a little frustrating to hear," Marquardt said.

Some spending remains hard to forecast, State Street Chief Financial Officer Michael Bell said on the call, such as the costs of meeting new regulations put in place after the financial crisis.

"I would say the big wild card really the higher legal and regulatory compliance costs," Bell said.

Chief Executive Jay Hooley said on the call that State Street benefited from strong equity markets but that areas like its trading operations were weakened by market volatility.

State Street manages cash for companies and handles back-office processing of securities and banking transactions for fund managers, among its other businesses. It no longer has retail branches.

Rival BNY Mellon, the world's largest custody bank, reported a modest increase in fourth-quarter profit last Friday.

State Street's total operating revenue rose 2.6 percent to $2.53 billion for the three months ended December 31

Revenue at the asset servicing business rose 7.1 percent to $1.23 billion, while it increased 5.9 percent to $125 million in foreign exchange trading.

Assets under custody and administration rose 12.5 percent to $27.43 billion as of Dec. 31.

Compensation and employee benefit costs increased 2.1 percent to $934 million.

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