State Street Corp (STT.N) said on Tuesday quarterly earnings declined on sharply lower foreign exchange revenue and weakness in international stock markets, sending shares down 5 percent.
Separately, State Street said it will buy Goldman Sachs Group Inc's (GS.N) hedge fund administration business for $550 million in cash.
"It's a home run," State Street Chairman and Chief Executive Jay Hooley said in a telephone interview. "We went after it aggressively."
But some analysts were concerned that the deal won't add to earnings on a generally accepted accounting principles (GAAP) basis until 2014 or 2015, although it will add to earnings on a cash basis in its first full year of operation.
Ken Usdin, a Jefferies & Co Inc analyst, said in a research note it was disappointing the deal won't add to GAAP earnings in the first year.
Boston-based State Street's second-quarter net income declined 4 percent to $480 million, or 98 cents a share, from $502 million, or $1.00 a share, a year earlier. The results included a $46 million loss from the sale of Greek investment securities.
Excluding items, per-share profit was $1.01, beating the analysts' average estimate of 97 cents, according to Thomson Reuters I/B/E/S.
Hooley said to investors and analysts on a conference call he expects capital markets to remain subdued around the globe.
"We expect global GDP to rise a somewhat anemic 3.2 percent in 2012, reflecting slow growth in the advanced economies and more marked slowing in the developed ones," Hooley said. "We expect the U.S. recovery to remain lackluster."
In the telephone interview Hooley also said State Street is studying how the Libor scandal may affect the company, which oversees a large amount of assets for pensions, hedge funds and mutual funds.
"We're looking internally where we do Libor," Hooley said. "It's hard to envision how it will unfold and if it will have any affect on us."
EMPLOYEE COSTS FELL 7 PERCENT
Company revenue declined to $2.42 billion from $2.49 billion. But at the same time, State Street trimmed employee compensation and benefit costs by nearly 7 percent year-over-year. The costs had worried investors and analysts when the company reported first-quarter results in April.
"Their ability to control expenses was a huge positive," Edward Jones analyst James Shanahan said.
Services fees generated from $22.4 trillion in assets under custody and administration dropped 3 percent to $1.09 billion from a year earlier.
Trading services revenue, which mostly includes foreign exchange activity, fell 18 percent to $255 million. Forex revenue fell 24 percent year-over-year on lower volatility, a reflection of weak capital markets.
Investment management fees from State Street Global Advisors was off 2 percent at $246 million. SSgA's assets under management came to $1.9 trillion, down 9 percent from a year earlier.
BATTLING LACKLUSTER MARKETS
The deal to buy the Goldman unit comes as State Street, the world's No. 3 custody bank, battles lackluster capital markets around the globe. Hooley said in the telephone interview that he's counting on the hedge fund industry to produce above-average growth.
By adding the roughly $200 billion that Goldman Sachs administers for about 150 investment managers, State Street will become the No. 1 hedge fund administrator globally, based on industry survey data, State Street said.
Hedge fund administrators provide the accounting, performance tracking and other back-office services essential in the fast-growing $2 trillion hedge fund industry.
Growing demand from regulators for an independent assessment of funds has increased hedge funds' use of administrators, leading to a number of deals in the sector.
State Street has made several acquisitions in the past years to strengthen this business.
The deal, subject to regulatory approval, is expected to be finalized in the fourth quarter and all affected Goldman employees, including management, are expected to join State Street.
At mid-day, shares of State Street were down 5 percent at $41.95.
(Reporting by Tim McLaughlin in Boston; editing by Jeffrey Benkoe and Lisa Von Ahn)