Zacks_Analysts' Blog : State Street Misses by a Penny - Analyst Blog

State Street Corporation (STT) reported fourth quarter 2011 operating earnings per share of 93 cents, a penny below the Zacks Consensus Estimate. However, this compares favorably with the prior-year quarter earnings of 87 cents.

On a GAAP basis, earnings for the quarter came in at 76 cents per share compared with earnings of $1.10 in the prior quarter and only 16 cents in the year-ago quarter.

Operating results for the quarter were aided by strong net interest revenue and lower expenses. Capital ratios were also steady during the quarter. However, lower non-interest revenue was among the negatives. Also, the company recorded $58 million pre-tax charges during the reported quarter associated with its business operations and information technology transformation program.

For the full year 2011, operating earnings came in at $3.73 per share, missing the Zacks Consensus Estimate by a penny. The company reported operating earnings of $3.40 in the previous year.

According to the requirement, the company has submitted its 2012 capital plan to the Federal Reserve earlier this month.

Quarter in Detail

State Street reported revenue of $2.32 billion in the quarter, down 5% sequentially but up 13% year over year. Operating revenue of $2.29 billion fell 5% from $2.41 billion in the prior quarter but was almost flat compared with $2.28 billion in the year-ago quarter. Operating revenue was substantially lower than the Zacks Consensus Estimate of $2.41 billion.

Operating revenues for the full year 2011 were $9.50 billion, up from $8.71 billion in the previous year. Full year revenues came in better than the Zacks Consensus Estimate of $9.70 billion. 

For the reported quarter, net interest revenue on an operating basis increased 2% sequentially and 5% year over year to $577 million. The sequential increase was mainly attributable to an increase in earning assets driven by an increase in client deposits.

Net interest margin (NIM) on an operating basis (excluding the excess deposits) was 1.55% in the quarter, down from 1.56% in the prior quarter and 2.07% in the prior-year quarter.

State Street reported 4% year-over-year decline in fee revenues during the quarter. The drop was mainly due to substantial fall in trading services and processing fees.

On an operating basis, expenses were $1.64 billion, down 5% sequentially but up 1% year over year. The sequential decline was mainly due to lower salaries and employee benefits expenses.

Total assets under custody and administration were $21.81 trillion as of December 31, 2011, up 1% year over year.

Capital and Profitability Ratios

State Street’s capital ratios continue to remain strong. As of December 31, 2011, Tier 1 risk-based capital ratio was 18.9%, up from 17.9% as of September 30, 2011 but down from 20.5% as of December 31, 2010. Tier 1 common to risk-weighted assets increased to 16.9% as of December 31, 2011 from 16.0% as of September 30, 2011 but decreased from 18.1% as of December 31, 2010.

For the reported quarter, return on common equity (on an operating basis) came in at 9.5% compared with 9.8% in both the prior quarter and the prior-year quarter.

Our Viewpoint

We anticipate the company’s restructuring programs along with well-off core servicing and investment management franchises to help offset the weakness caused by the sluggish economic recovery. However, given the ongoing weakness in the mortgage market, we remain concerned about the sizable amount of mortgage-backed and asset-backed securities in its investment portfolio.

Among State Street’s competitors, BB&T Corp. (BBT) is scheduled to report fourth quarter earnings on January 19 while SunTrust Banks Inc. (STI) will report on January 19.

State Street currently retains a Zacks #3 Rank, which translates into a short-term Hold’ rating. Considering the company’s fundamentals, we are also maintaining our long-term “Neutral” recommendation on the shares.