State Street Corp., the third-largest custody bank, said it will eliminate 630 jobs in its third round of cuts in two years to bolster profit as record low interest rates weigh on revenue from lending.
Friday’s announcement, equal to about 2 percent of the company’s workforce, brings job cuts since November 2010 to almost 2,900, as Chief Executive Officer Joseph Hooley seeks to offset the impact of lower income from lending and muted trading activity among clients. State Street, which has come under pressure from shareholders including Trian Fund Management LP’s Nelson Peltz to improve profitability, repurchased 10.9 million shares for $480 million in the fourth quarter, helping earnings per share exceed analysts’ estimates.
“The big impact was from a fairly significant share repurchase,” Marty Mosby, a Memphis, Tennessee-based equity analyst at Guggenheim Securities LLC, said in an interview. “They accelerated their repurchase plan, brought the share count lower and pushed up earnings per share.”
Net income on an operating basis increased 15 percent in the fourth quarter to $521 million, or $1.11 a share, from $454 million, or 93 cents, a year earlier, the Boston-based company said in a statement. Earnings beat the $1.01-a-share average estimate of 22 analysts surveyed by Bloomberg.
Hooley last year said he was taking a “cautious” approach to acquisitions. State Street made at least five acquisitions since he took over in March 2010. The purchases have drawn criticism from Peltz, whose Trian was the ninth-biggest holder of State Street’s shares as of Sept. 30, according to data compiled by Bloomberg.
Edward Resch, the firm’s chief financial officer for more than a decade, will retire this year when a successor is found, the company said in November.
State Street has struggled to raise operating profit over the past four years as the U.S. Federal Reserve held its benchmark interest rate at zero to 0.25 percent since December 2008 in an attempt to stimulate borrowing and economic growth. Low rates hurt custody banks by reducing the return they make on their own investments and lending. They’ve also forced State Street to waive some fees on money-market funds to keep client returns above zero.
Rising markets helped State Street in 2012 as the MSCI ACWI Index of global equities gained 13 percent, following a 9.4 percent decline in 2011. State Street charges custody and investment management fees based on the amount of money it oversees for clients.
Revenue rose 7 percent to $2.46 billion, driven by a 29 percent jump in investment-management fees as the amount of money State Street invests for clients rose 13 percent. Assets under custody rose 12 percent, and the fees they generate rose 8.8 percent. Expenses increased 4.8 percent to $1.71 billion.
The company has set aside an additional $400 million for repurchases through the end of March.
Bank of New York Mellon Corp., the largest custody bank, said on Jan. 16 that fourth-quarter net income rose 23 percent from a year earlier to $622 million, or 53 cents a share. Chicago-based Northern Trust Corp., the third-biggest independent custodian, said fourth-quarter earnings rose 29 percent to $167.7 million, or 69 cents a share.
The increase for both companies was driven by rising equity markets and by restructuring costs booked in the fourth quarter of 2011 that weren’t repeated last year. Low interest rates and lower foreign exchange trading helped keep revenue growth to about 2 percent for both BNY Mellon and Northern Trust.
State Street’s operating profit excludes money earned from the sale or maturing of bonds whose value was written down in May 2009, which the company records as “discount accretion” within net interest income.
Results were announced before the start of regular U.S. trading. State Street gained 18 percent in the past year through yesterday, compared with a 24 percent advance by BNY Mellon and a 27 percent increase by the Standard & Poor’s 20-company index of asset managers and custody banks.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.
© Copyright 2014 Bloomberg News. All rights reserved.