Tuesday, financial services provider State Street Corp. (STT) reported a sharp decline in its fourth-quarter profit, daunted by a variety of charges. On an operating basis, the company's earnings were lower than the prior-year quarter, but managed to come above analysts' forecast. Looking forward, State Street expects roughly flat operating earnings per share and revenue for fiscal 2009. The company's shares have fallen more than 50% in the morning trading hours.
The company's net income for the quarter was $87 million, down from $223 million reported a year ago. Fourth-quarter net income available to common shareholders declined 71% to $65 million, or $0.15 per share, from $223 million, or $0.57 per share, in the same period last year. For the sequentially preceding quarter, State Street delivered earnings of $477 million, or $1.09 per share. On an operating basis, the company reported net income of $533 million and net income available to common shareholders of $511 million, or $1.18 per share. This compares to last year quarter's net income as well as net income attributable to common shareholders of $540 million, or $1.38 per share, in operating terms.
Analysts polled by First Call/Thomson Financial expected the company to report earnings, on average, of $1.14 per share. Analysts' estimates typically exclude one-time items.
Operating earnings for the fourth quarter of 2008 excluded net effects of $723 million, or $1.03 per share, which included $450 million related to the previously disclosed transaction with certain stable value funds managed by State Street Global Advisors, restructuring charges of $306 million, and merger and integration costs of $27 million associated with the 2007 acquisition of Investors Financial Services Corp.
These charges were partially offset by net interest revenue of $60 million from acting as an intermediary under the Federal Reserve Bank's Asset-Backed Commercial Paper Money Market Liquidity Facility, or AMLF, the company noted.
Excluded in the year-ago quarter operating earnings were $524 million pre-tax charges associated with active fixed-income strategies at State Street Global Advisors and merger and acquisition costs associated with Investors Financial.
Revenue rose 8% to $2.67 billion from $2.48 billion in the prior-year quarter. In operating terms, revenues were $2.64 billion, up 5.8% from $2.5 billion in the same quarter last year. Analysts projected revenues of $2.42 billion for the quarter. State Street's revenue for the third quarter was $2.77 billion.
During the quarter, the company's fee revenue reached $1.88 billion, lower than the $1.93 billion recorded in the previous-year quarter. Servicing fees were $842 million, down 13% from the year-ago quarter. Management fees generated by State Street Global Advisors declined 30% year-over-year to $209 million, reflecting lower average month-end equity valuations and lower performance fees.
The company's trading services revenue was up 19% to $418 million, driven by higher volatility in foreign exchange, partially offset by a decline in foreign exchange volumes and in brokerage and other revenue. Securities finance revenue was $329 million, compared with $256 million in the year-ago quarter, an increase of 29%. Processing and other revenue climbed 51% from last year to $83 million, helped by higher product-related revenue.
Further, total net interest revenue on a reported basis rose to $843 million from $556 million a year ago. On an operating basis, net interest revenue totaled $811 million, up from $573 million in the fourth quarter of fiscal 2007.
For fiscal 2008, State Street posted net income available to common shareholders of $1.62 billion, or $3.89 per share, compared with $1.26 billion, or $3.45 per share, a year ago. In operating terms, net income available to common shareholders rose to $2.17 billion, or $5.21 per share, from $1.67 billion, or $4.57 per share, last year.
Full-year reported revenue reached $10.69 billion, up from $8.34 billion in fiscal 2007. Wall Street analysts projected full-year 2008 earnings of $5.18 per share, with a revenue estimate of $10.30 billion.
Among others in the sector, Northern Trust Corp. (NTRS) is set announce its fourth-quarter results on January 21. Analysts are of the view that the company will earn $0.92 per share in the quarter on revenues of $968.22 million.
Another peer, The Bank of New York Mellon Corp.'s (BK) fourth-quarter results are scheduled to be released on January 22. Analysts expect the company to report a profit of $0.69 per share, on revenues of $3.78 billion.
Meanwhile, on January 16, troubled financial services firm Citigroup, Inc. (C) reported a net loss of $8.29 billion for the fourth quarter of fiscal 2008, mainly due to write-downs and losses in Securities and Banking, net credit losses, and a $6 billion net loan loss reserve build. Citi's revenues were down 13% in the quarter.
Going ahead, State Street expects that its fiscal 2009 operating earnings per share and revenue will be approximately flat with fiscal 2008. The operating earnings per share outlook is below the company's long-term goal of 10% to 15% growth and the revenue forecast is lower than its long term goal of 8% to 12% growth. Fiscal 2009 net interest income and net interest margin are also projected to be approximately flat with 2008.
The company also projects its operating return on equity to be slightly below the long-term goal of 14% to 17%. Additionally, State Street said that it is evaluating the market from time to time. Following recent discussions with investors, the company has decided not to raise equity capital in the turbulent market.
STT is trading at $17.99, down $18.36, on a volume of more than 21 million shares.
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