State Street Corp. ( STT) reported second-quarter 2014 operating earnings of $1.39 per share, surpassing the Zacks Consensus Estimate of $1.26, driven by increased non-interest income. Also, the reported figure was up 12% from the prior-year quarter figure of $1.24.
Better-than-expected results were mainly attributable to a rise in fee income, partly offset by lower net interest income and higher operating expenses. Moreover, improvement in asset position acted as a tailwind.
After considering certain non-recurring items, net income applicable to common shareholders was $602 million, up 5% year over year.
Performance in Detail
Revenues on an operating basis came in at $2.68 billion, up 4% from the prior-year quarter. Further, it beat the Zacks Consensus Estimate of $2.60 billion.
Net interest revenue on an operating basis inched down 1% year over year to $575 million. The fall was mainly due to lower yields on earning assets, partly offset by lower interest expense. Likewise, net interest margin was 1.12%, down 19 basis points year over year.
Fee revenues came in at $2.1 billion, increasing 5% from the prior-year quarter. The rise was attributable to an increase in servicing fees, management fees, processing and other revenues as well as securities finance fees, partially offset by lower total trading services revenues.
On an operating basis, non-interest expenses climbed 4% from the year-ago quarter to $1.82 billion. All the components increased except other expenses.
Total assets under custody and administration were $28.4 trillion as of Jun 30, 2014, up 10% year over year. Moreover, assets under management were $2.48 trillion, up 16% from the prior-year quarter.
Capital and Profitability Ratios
State Street’s capital and profitability ratios improved. Under Basel III final rule (Advanced approach), the estimated Tier 1 common ratio was 12.8% as of Jun 30, 2014, up from 10.9% as of Jun 30, 2013.
Return on common equity (on an operating basis) came in at 11.9%, up from 11.3% in the year-ago quarter.
During the reported quarter, State Street repurchased shares for $410 million at an average price of $65.02 per share. This was part of the company’s buyback plan authorizing purchase of up to $1.7 billion worth of stock through the first quarter of 2015.
We anticipate State Street’s restructuring programs, along with stable core servicing and investment management franchises, to help offset its financial weakness. Moreover, enhanced capital deployment initiatives reinforce the company’s priority to enhance shareholders’ value. However, a low interest rate environment, increased expenses and a persistent fall in net interest revenue are expected to drag State Street’s top line in the quarters ahead.
Currently, State Street carries a Zacks Rank # 3 (Hold).
Performance of Other Major Regional Banks
Comerica Incorporated ( CMA) and KeyCorp. ( KEY) surpassed the Zacks Consensus Estimate. Both Comerica and KeyCorp benefited primarily from lower expenses and a decline in provision for loan and lease losses.
Additionally, SunTrust Banks, Inc. ( STI) outpaced the Zacks Consensus Estimate, driven by growth in revenues and lower provision for loan losses. However, rising operating expenses acted as a dampener.