BOSTON State Street Corp (STT.N), the No. 2 global custody bank, said Tuesday that third-quarter net income rose 20 percent, but foreign currency trading results fell sharply, pulling down overall revenue.
Still, analysts gave the company credit for winning new business in investment management and record-keeping for money managers, while keeping a lid on compensation costs amid the lagging revenue. And its operating profit topped Wall Street estimates.
Its shares rose 4.7 percent to $43.53 in late-morning trade. The stock is up 23 percent over the past 12 months, outpacing the 18 percent gain on the S&P 500 index.
On Monday, the Financial Times reported some big State Street shareholders were unhappy with the pace of Chief Executive Jay Hooley's $600 million-plus cost-cutting program.
But the company surprised Wall Street with a compensation ratio of 39 percent - compensation as a percentage of operating revenue - in the quarter, as many analysts expected revenue to be flat to down.
"They kept it below 40 percent and that was a huge positive," Edward Jones analyst Jim Shanahan said. "There was skepticism that they would achieve that."
Still, executives said on a conference call with analysts and investors that State Street could miss its full-year compensation ratio target of 39 percent if revenue is flat or down for the rest of the year.
"I would like to think that the moves that we're making today against a very constrained market-driven revenue, should put us in a position where that 40 percent (compensation ratio) should go down over time as we achieve something near normalized environmental factors," Hooley said.
But the ratio could creep upward if market-related revenue continues to fall, company executives said.
Third-quarter foreign exchange revenue dropped 44 percent to $115 million from the year-ago level of $204 million. Total operating revenue was $2.35 billion, down 2.7 percent from a year ago.
State Street, which is fighting several lawsuits that claim it overcharged on forex trades, blamed lower volatility for the decline in revenue. It also said the type of forex trades targeted by the lawsuits continue to come under pressure as customers use cheaper alternatives offered by the bank.
Fees from managing investments, meanwhile, were a bright spot, surging 10 percent to $251 million amid a rise on global stock markets. Net interest revenue - largely the difference between what the bank pays on deposits and earns on loans and investments - rose 7 percent to $619 million from a year ago.
Compensation and benefit costs declined 5 percent in the quarter to $916 million.
"Put in together, we think State Street did a decent job, with return on equity improving to 13.3 percent," Nomura Securities analyst Glenn Schorr said in a research note. "There are more (stock) buybacks to come, but we see limited upside to estimates at this point, given the weak revenue environment."
Boston-based State Street's net income rose to $654 million, or $1.36 a share, after a $362 million benefit related to the 2008 bankruptcy filing by Lehman Brothers. In the year-ago period, the bank earned $543 million, or $1.10 a share.
On an operating basis, it earned 99 cents a share. Analysts, on average, expected 96 cents, according to Thomson Reuters I/B/E/S.
Total assets under custody and administration totaled $23.44 trillion at the end of September, up from $22.4 trillion in the second quarter and $21.5 trillion in the year-ago period.
State Street's operations include keeping track of mutual fund prices, lending stocks, trading foreign currencies and gathering deposits from the world's largest institutional investors.
It is the second largest custody bank behind BNY Mellon Corp (BK.N), which reports results on Wednesday.
(Reporting by Tim McLaughlin; Editing by Jeffrey Benkoe)