Saturday, January 15, 2011

State Street Corp. (NYSE: STT): Q4 Earnings Preview 2011

State Street Corp. (NYSE: STT), the third-largest custody bank, is scheduled to release its fourth-quarter earnings before the opening bell on Wednesday, January 19, 2011. Analysts, on average, expect the company to report earnings of 85 cents per share on revenue of $2.19 billion. In the year ago quarter, the company reported earnings of 99 cents per share on revenue of $2.31 billion.

State Street Corporation, through its subsidiaries, provides various products and services for the institutional investors worldwide. The Company, through its subsidiaries, including its banking subsidiary, State Street Bank and Trust Company, provides products and services for institutional investors worldwide. With assets under custody in excess of $19 trillion, State Street is the third largest custodian of assets globally. State Street also provides investment advisory services on assets in excess of $1.9 trillion.

In the preceding third quarter, the Boston, Massachusetts-based company's net income was $546 million, or $1.08 a share, from $327 million, or 66 cents a share, in the year-ago quarter. Revenue grew slightly to $2.31 billion from $2.24 billion. Analysts, on average, expected the company to report earnings of 83 cents per share on revenue of $2.19 billion. 

At its last earnings call in October, the company said that it continues to expect that fiscal 2010 operating-basis earnings per share, which exclude discount accretion, will be slightly above the adjusted operating-basis of $3.32 per share recorded last year.

Late in November, the company said that it will cut 5% of its workforce, or 1,400 jobs, as part of a multi-year restructuring action. The restructuring program also includes enhancements to business operations and information technology systems. The company noted that the first job cuts will be implemented in December 2010 and be substantially completed by the end of 2011. State Street said that it expects to recognize restructuring costs of about $400 million to $450 million over a period of four years, beginning in the fourth quarter of 2010. The company will record about $160 million to $165 million of these restructuring costs in the fourth quarter, which relate primarily to a reduction in its workforce of about 1,400 employees and a planned real estate consolidation.

State Street said that in order to lower its occupancy costs, which have grown in recent years through acquisitions, the company will exercise early buy-outs, lease terminations, or certain sublease arrangements. In addition, State Street will take advantage of alternative work arrangements.

Excluding restructuring charges, State Street anticipates its 2011 incremental costs will be offset by benefits accruing from the fourth-quarter actions and from the program, and result in a slight pre-tax cost savings related to the program in 2011. By the end of 2014, the company expects the related annual pre-tax run-rate savings to be about $575 million to $625 million.

State Street said its stated goal is to double its non-U.S. revenues over the five-year period ending in 2014. As part of its efforts, the company completed the acquisitions of Intesa Sanpaolo's securities services business and Mourant International Finance Administration in 2010, and recently announced its agreement to acquire Bank of Ireland Asset Management.

The company also plans to invest in technologies such as private processing clouds and will develop new methods and tools to accelerate the pace of innovation and the introduction of new services and solutions.

Early in December, the company said that it would sell $11 billion in problem investments and take a $350 million loss on the securities, mostly mortgage-related assets it acquired during the subprime lending boom. State Street noted that the transaction will also increase its balance sheet flexibility in deploying its capital, enhance its capital ratios under evolving regulatory capital standards, and reduce its exposure to certain asset classes.The transaction will reduce earnings by $350 million in the current quarter, the company said. The transaction will reduce net interest income by $375 million in 2011, State Street said. The company reiterated a forecast for 2010 full-year operating profit to be “slightly” higher than the $3.32 a share reported in 2009. The company also reaffirmed its previously disclosed outlook for 2010 operating-basis net interest margin to be slightly higher than 165 basis points.

State Street plans to reinvest the proceeds from the sale mostly in asset-backed and mortgage-backed securities rated AAA and AA, the two highest levels, as well as U.S. Treasuries and agency securities, according to the statement. By replacing lower-rated holdings with less-risky assets, the bank improved its Tier 1 common ratio. The sale reduces State Street’s risk- weighted assets to $63.7 billion from $75.6 billion as of Sept. 30.

In terms of stock performance, State Street shares have gained nearly 11% over the past year.

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