Shares of State Street Corporation STT fell 3.2% on Dec 17, after an ongoing internal review in the company highlighted that it has erroneously invoiced more than $200 million to its asset servicing clients, primarily in the U.S. over an 18-year period.
We believe an anticipated rise in compliance and legal expenses stemming from a probable regulatory action made investors apprehensive about the company’s bottom-line performance in the near term.
Notably, the company has been overcharging such clients, which include mutual funds, pension funds and other large investors, for “out of pocket” costs like printing and postage, for over nearly two decades.
Further, the categories of expenses under review in 2014 represented 0.7% of the company’s total asset servicing revenue of $5.1 billion. For the 18-year period under review, total expenses were $400 million.
Nonetheless, company intends to fully reimburse the affected clients, along with applicable interest. However, the total amount of client compensation would be known only after the review is completed. Moreover, State Street stated that such amount can “differ materially from the Company’s preliminary assessment”.
According to sources, William F. Galvin, Secretary of State, has opened an inquiry to gain increased transparency in the matter. Further, State Street spokesperson Anne McNally stated that the bank has contacted relevant regulators. As a result, as per an analyst at UBS Securities, State Street is expected to “remain under the microscope by both regulators and investors for the foreseeable future.”
More importantly, the company will provide further details about the matter at its earmarked fourth-quarter 2015 earnings release and conference call on Jan 27, 2016.
State Street currently carries a Zacks Rank #3 (Hold). Bank of the Ozarks, Inc. OZRK and National Bank Holdings Corp. NBHC are better-ranked bank stocks, both sporting a Zacks Rank #1 (Strong Buy). The PNC Financial Services Group, Inc. PNC is another favorably placed stock, holding a Zacks Rank #2 (Buy).
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