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State Street Corporation (STT - Analyst Report) reported third-quarter 2013 operating earnings per share of $1.19, which was in line with the Zacks Consensus Estimate. Results also compared favorably with 99 cents earned in the prior-year quarter.

Results benefited from growth in fee income. Further, improvement in both asset position and profitability ratios were the tailwinds. However, decline in net interest revenues, higher-than-expected expenses and deteriorating capital ratios were the dampeners.

After considering certain non-recurring items, net income applicable to common shareholders was $531 million, down 18.8% year over year.

Performance in Detail

Revenues on an operating basis came in at $2.47 billion, improving 3.4% from $2.39 billion in the prior-year quarter. However, operating revenues were below the Zacks Consensus Estimate of $2.52 billion.

Net interest revenue on an operating basis declined 9.5% from the previous-year quarter to $533 million. The fall was mainly due to lower yields on earning assets, partly offset by lower liability costs. Likewise, net interest margin was 1.27% in the quarter, down 17 basis points year over year.

Fee revenues came in at $1.92 billion, increasing 9.2% from $1.76 billion in the prior-year quarter. The rise was attributable to an increase in servicing fees, management fees, processing and other fees as well as trading services fees, partially offset by a fall in securities finance fees.

On an operating basis, non-interest expenses were $1.69 billion, up 1.4% year over year. The increase was primarily driven by higher information systems and transaction processing service, partially offset by decline in compensation and employee benefits expenses as well as occupancy expenses.

Total assets under custody and administration were $26.03 trillion as of Sep 30, 2013, up nearly 11.1% year over year. Moreover, assets under management were $2.24 billion, up 8.5% from the prior-year quarter.

Capital and Profitability Ratios

State Street’s capital ratios deteriorated, while profitability ratio improved. As of Sep 30, 2013, Tier 1 capital ratio was 17.3%, down from 19.8% as of Sep 30, 2012. Likewise, Tier 1 common to risk-weighted assets decreased to 15.5% as of Sep 30, 2013 from 17.8% as of Sep 30, 2012.

Further, under Jul 2013 Basel III final rule, the estimated Tier 1 common ratio was 11.3% as of Sep 30, 2013.

Return on common equity (on an operating basis) came in at 11.0%, increasing from 9.6% in the year-ago quarter.

Share Repurchase

During the reported quarter, State Street repurchased shares worth $560 million at an average price of $68.57 per share. This was part of the company’s buyback plan authorizing purchase of up to $2.1 billion worth of stock through Mar 13, 2014. As of Sep 30, 2013, the company has nearly $1.0 billion remaining under stock repurchase program.

Performance of Other Regional Banks

Earnings for The Bank of New York Mellon Corporation (BK - Analyst Report), Northern Trust Corporation (NTRS - Analyst Report) and KeyCorp (KEY - Analyst Report) outpaced the Zacks Consensus Estimate. The results benefited from growth in revenues and lower provision, partially offset by higher expenses.

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 increase 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.

Currently, State Street carries a Zacks Rank #3 (Hold).

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