UPDATE 5-State Street reports higher profit, shares jump
(Adds assets under management, custody in graph 9)
By Svea Herbst-Bayliss
BOSTON, July 15 (Reuters) - State Street Corp (STT.N), one of the world's biggest institutional money managers, reported a bigger-than-expected jump in quarterly profit on Tuesday and said it was beating many rivals in winning new business.
Its shares rose more than 9 percent.
The Boston-based company, which also earns fees for calculating the bulk of mutual fund prices printed in newspapers, said second-quarter net income increased 50 percent to $548 million, or $1.35 per share, from $366 million, or $1.07 a share, a year earlier.
Excluding costs from the acquisition of Investors Financial Services Corp, earnings were $1.40 per share, 4 cents above the average Wall Street forecast, according to Reuters Estimates.
Revenue climbed 39 percent to a record $2.7 billion.
The company, which has been benefiting from low interest rates, said the results prompted it to raise its full-year earnings targets to the higher end of their established ranges.
Executives said State Street had won $400 billion to $600 billion in new business during the last three quarters.
"There is some flight to quality," Chief Executive Ron Logue said in an interview. Currently some large competitors are still digesting mergers, leaving State Street as a solid and stable player.
The company makes a lot of its money on the spread between what it pays customers to hold their securities in custody and what it earns on investing them, Logue said.
At the same time, companies like State Street benefit from volatile market conditions because they are paid for accounting services on portfolios that can move around a lot during turbulent times.
And State Street has been benefiting from last year's acquisition of cross-town neighbor Investor Financial Services Corp, which executives said is expected to add as much as 7 cents a share to earnings this year.
NET INTEREST REVENUE GROWTH
A main driver in State Street's higher results was the 71 percent jump in net interest revenue to $657 million. This quarter the company earned significantly more money for investing funds than it had to pay out to hold customer funds, thanks in part to recent Federal Reserve interest rate cuts aimed at stimulating the sluggish economy.
Fee revenue, earned for managing money and servicing portfolios, climbed 31 percent.
State Street has $15.3 trillion in assets under custody and $1.89 trillion in assets under management.
"The results were good but not great," RBC Capital Markets analyst Gerard Cassidy said. "The growth in net interest revenue has been surpassing fee revenue, and that's not as highly valued. We would rather see fee revenue be the dominant grower."
Investors and analysts also expressed some concern about unrealized losses State Street has in its off-balance-sheet commercial paper program. They widened to $1.6 billion from $1.5 billion during the first quarter and have inched up a little more in the last days, Chief Financial Officer Ed Resch said on a conference call.
Both Resch and Logue said they do not expect to move these items, known as conduits, onto the balance sheet.
State Street has also taken action and sold $2.8 billion in stock to act as a buffer for potential losses it might face on some mortgage-debt funds.
Overall, the quarterly results were strong enough to prompt the normally conservative State Street to raise its earnings outlook.
The company said it expects 2008 growth in operating earnings per share to approach the high end of its previously announced forecast range of 10 to 15 percent and growth in operating return on equity to approach the high end of its 14 to 17 percent outlook.
Last month State Street executives said they expected operating earnings and operating return on equity in the middle of those ranges.
State Street shares were up $5.17, or 9.3 percent, at $60.87 in afternoon New York Stock Exchange trade. (Reporting by Svea Herbst-Bayliss, editing by Lisa Von Ahn and Gerald E. McCormick)
