State Street Corp. (STT) reported third-quarter 2014 operating earnings of $1.35 per share, outpacing the Zacks Consensus Estimate of $1.22, driven by strong revenue growth. Also, the reported figure was up 13% year-over-year.
Better-than-expected results were mainly driven by higher net interest income and a rise in fee income, which were, however, partially offset by higher operating expenses. Further, asset position continued to show improvement, and capital and profitability ratios remained strong.
After considering certain non-recurring items, net income available to common shareholders was $542 million or $1.26 per share, up from $531 million or $1.17 per share in the year-ago quarter.
Details
Revenues on an operating basis came in at $2.68 billion, up 9% from the prior-year quarter. Also, it was ahead of the Zacks Consensus Estimate of $2.61 billion.
Net interest revenue, on an operating basis, grew 5% year over year to $580 million. The rise was mainly due to higher level of interest-earning assets, partly offset by lower yields on earning assets. However, net interest margin was 1.06%, down 21 basis points year over year.
Fee revenues came in at $2.1 billion, increasing 9% from the prior-year quarter. All components of fee income showed improvement, with securities finance fees growing 34% and management fees up 15%.
On an operating basis, non-interest expenses climbed 7% from the year-ago quarter to $1.81 billion. All the components of operating expenses increased.
Total assets under custody and administration were $28.5 trillion as of Sep 30, 2014, up 9% year over year. Moreover, assets under management were $2.42 trillion, up 8% from the prior-year quarter.
Capital and Profitability Ratios
State Street’s capital and profitability ratios remained strong. Under Basel III final rule (Advanced approach), the estimated Tier 1 common ratio was 12.7% as of Sep 30, 2014, compared with 12.8% as of Jun 30, 2014.
Return on common equity (on an operating basis) came in at 11.4%, up from 11.0% in the year-ago quarter.
Share Repurchases
During the reported quarter, State Street repurchased $410 million of shares at an average price of $70.61 per share. This was part of the company’s buyback plan, authorizing purchase of up to $1.7 billion worth of stock through the first quarter of 2015.
Our Viewpoint
We anticipate State Street’s restructuring programs, along with stable core servicing and investment management franchises, to help offset its financial weakness. Also, enhanced capital deployment initiatives will reinforce the company’s priority to enhance shareholders’ value.
However, a low interest rate environment, mounting expenses and a persistent fall in net interest revenue are expected to drag State Street’s top line in the quarters ahead.
Currently, State Street carries a Zacks Rank #3 (Hold).
Performance of Other Major Regional Banks
The PNC Financial Services Group, Inc. (PNC) reported another impressive quarter with an earnings surprise of 4.7%, primarily attributable to its cost-containment measures. Results were mainly driven by a decrease in both non-interest expenses and provision for credit losses, partially offset by lower top line.
However, M&T Bank Corporation (MTB) and Comerica Incorporated (CMA) lagged the Zacks Consensus Estimate. For M&T Bank, lower-than-expected results were the outcome of reduced revenue growth and a rise in operating expenses, partially offset by a fall in provision for loan losses. Comerica’s results were adversely impacted by decrease in non-interest income, partly offset by a decline in non-interest expenses and provision for credit losses.
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