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State Street Corporation (STT - Analyst Report) reported second-quarter 2013 operating earnings was $1.24 per share, beating the Zacks Consensus Estimate by a nickel. This also compares favorably with the prior-year quarter earnings of $1.01.

Better-than-expected results benefited from improvement in fee income, partially offset by higher operating expenses and a decrease in net interest income. Further, asset position and capital ratios remain robust.

After considering certain non-recurring items, net income applicable to common shareholders was $571 million, up 19.0% year over year.

Performance in Details

Revenue on an operating basis came in at $2.58 billion, improving 4.9% from $2.46 billion in the prior-year quarter. Moreover, operating revenue was ahead of the Zacks Consensus Estimate of $2.53 billion.

Net interest revenue on an operating basis declined 7.5% from the previous-year quarter to $582 million. The fall was mainly due to lower yields on earning assets, partly offset by lower liability costs.

Likewise, net interest margin was 1.31% in the quarter, down 23 basis points year over year, reflecting lower yields on earning assets and higher levels of central bank balances.

Fee revenues came in at $2.30 million, increasing 11.4% from $2.07 billion in the prior-year quarter. The rise was attributable to an increase in servicing fees, management fees and trading services fees, partially offset by a fall in securities finance fees as well as processing and other fees.

On an operating basis, non-interest expenses were $1.75 billion, up 1.4% year over year. The increase was primarily driven by higher information systems, transaction processing service, partially offset by a decline in compensation and employee benefits expenses as well as occupancy expenses.

Total assets under custody and administration were $25.74 trillion as of Jun 30, 2013, up nearly 14.8% year over year. Moreover, State Street’s total assets under management were $2.15 billion, up 12.5% from the prior-year quarter.

Capital and Profitability Ratios

State Street’s capital ratios deteriorated, while profitability ratio improved. As of Jun 30, 2013, Tier 1 capital ratio was 16.6%, down from 19.9% as of Jun 30, 2012 and 18.0% as of Mar 31, 2013. Likewise, Tier 1 common to risk-weighted assets decreased to 14.9% as of Jun 30, 2013 from 17.9% as of Jun 30, 2012 and 16.1% as of Mar 31, 2013.

Further, under Jul 2013 Basel III final rule, the estimated Tier 1 common ratio was 10.9% as of Jun 30, 2013.

Return on common equity (on an operating basis) came in at 11.3%, increasing from 10.3% in the year-ago quarter and 8.9% from the prior quarter.

Share Repurchase

During the reported quarter, State Street repurchased shares worth $560 million at an average price of $65.73 per share. This was a part of the company’s buyback plan authorizing purchase of up to $2.1 billion worth of stock through Mar 13, 2014.

Performance of Other Major Regional Banks

Like State Street, The Bank of New York Mellon Corporation (BK - Analyst Report) beat the Zacks Consensus Estimate. Better-than-expected results were mainly driven by growth in revenues, partially offset by higher operating expenses. Further, the company’s credit quality and asset position continued to improve, while capital ratios remained healthy.

However, Northern Trust Corporation (NTRS) lagged the Zacks Consensus Estimate.  Lower-than-expected results were due to a rise in operating expenses, partly offset by top-line growth. Though its capital position remained strong, deteriorating credit quality was a headwind.

Another major bank, BankUnited, Inc. (BKU - Analyst Report) is scheduled to announce results on Jul 24.

Our Take

We anticipate State Street’s restructuring programs, along with stable core servicing and investment management franchises to help offset its financial weakness. In addition, the recent acquisitions will further augment revenues.

Moreover, enhanced capital deployment initiatives reinforce the company’s priority to enhance shareholders’ value. However, a low interest rate environment and declining net interest revenues are expected to hamper State Street’s top line in the coming quarters.

State Street currently carries a Zacks Rank #2 (Buy).

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