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State Street Corporation (STT - Analyst Report) reported its first-quarter 2013 operating earnings of 96 cents per share, marginally beating the Zacks Consensus Estimate of 93 cents. This also compares favorably with the prior-year quarter’s earnings of 84 cents.

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

After considering certain non-recurring items, net income came in at $455 million or 98 cents per share. This compares favorably with the year-ago quarter’s net income of $417 million or 85 cents per share.

Performance in Details

Revenue on an operating basis came in at $2.5 billion, improving 2.0% from $2.4 billion in the prior-year quarter. Operating revenue was in line with the Zacks Consensus Estimate.

Net interest revenue on an operating basis declined 4.9% from the previous-year quarter to $577 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 21 basis points year over year, reflecting lower yields on earning assets and higher levels of client deposits.

Fee revenue came in at $1.89 million, increasing 4.9% from $1.80 billion in the previous year quarter. The rise was attributable to increases in servicing 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 $1.81 billion, inching up 0.7% year over year. The increase was primarily driven by higher information systems, partially offset by a decline in compensation and employee benefits expenses, transaction processing service costs and occupancy expenses.

Total assets under custody and administration were $25.42 trillion as of Mar 31, 2013, up nearly 9.5% year over year and 4.3% sequentially. Moreover, State Street’s total assets under management stood at $2.18 billion, up 9.9% from the last year quarter and 4.3% from the prior quarter.

Capital and Profitability Ratios

Though State Street’s capital ratios deteriorated, they remained strong. As of Mar 31, 2013, Tier 1 capital ratio was 18.0%, down from 19.1% both as of Mar 31, 2012 and Dec 31, 2012. Likewise, Tier 1 common to risk-weighted assets decreased to 16.1% as of Mar 31, 2013 from 17.2% as of Mar 31, 2012 and 17.1% as of Dec 31, 2012.

Further, the estimated Basel III Tier 1 common ratio fell to 10.6% as of Mar 31, 2013 from 10.8% as of Dec 31, 2012.

Return on common equity (on an operating basis) came in at 8.9%, increasing from 8.6% in the year-ago quarter but decreasing from 10.3% from the prior quarter.

Share Repurchase

In March, State Street received the Federal Reserve’s approval for its 2013 capital plans after the clearance of the stress test. Upon receiving the approval, the company announced a buyback plan authorizing purchase of up to $2.1 billion worth of stock through Mar 13, 2014.

During the reported quarter, State Street bought back 6.5 million shares at an aggregate cost of $360 million. This completes the company’s share repurchase authorization, which was part of its 2012 capital plan.

Performance of Other Major Regional Banks

Unlike State Street, both The Bank of New York Mellon Corporation (BK - Analyst Report) and Northern Trust Corporation (NTRS - Analyst Report) marginally missed the Zacks Consensus Estimate. The results for both the companies were adversely affected by a rise in operating expenses.

Another major bank, BankUnited, Inc. (BKU - Analyst Report) is scheduled to announce reports on Apr 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. Also, the capital plan approval reinforces the company’s priority to enhance shareholders’ value.

The low interest rate environment and deteriorating net interest revenue are expected to dent State Street’s top line in the upcoming quarters. Despite these concerns, sound capital deployment activities will boost investors’ confidence in the stock.

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

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