State Street Battles Weak Revenue; Cost Cuts Possible

State Street Corp Chief Executive Jay Hooley on Tuesday delivered a stark reminder that the custody bank's revenue remains under pressure and vowed to revisit more cost cutting.

"We're looking at everything," Hooley said during a presentation at the Barclays Financial Services Conference. He allayed some investor concerns after revising a key capital ratio upward while emphasizing the bank is focused on returning capital to shareholders through dividends and stock buybacks.

But the Boston-based bank's massive program to streamline its technology infrastructure might not be enough to tame expenses amid weak trading revenue, Hooley said. In addition, State Street's net interest margin - largely the difference between what the bank pays on deposits and what it earns on the money through investing - is expected to fall 10 to 12 basis points next year.

Currently, the bank's margin is expected to be 145 basis points to 155 basis points this year.

As interest rates remain at ultra-low levels, State Street's multibillion-dollar investment portfolio continues to mature, forcing the bank to roll over money into lower rate investments. Between 2009 and 2012, about $16 billion per year of total assets, excluding U.S. Treasuries, in the investment portfolio have matured or have been paid down, according to an online presentation.

Meanwhile, State Street's trading revenue remains under pressure as global capital market activity remains weak.

State Street is currently in the middle of an IT transformation program that is expected to give the company $600 million in pre-tax savings in 2015. That might not be enough as foreign exchange revenue and other trading revenue come under pressure.

Hooley said he will consider additional structural improvements and cutting outside consulting expenses, for example.

He said, however, that it is difficult to match cost reductions with trading revenue declines because that business generates a higher profit margin than other activities.

Since Jan. 3, State Street shares have risen 6 percent, but they are underperforming the 14.6 percent rise on the Dow Jones U.S. Asset Managers Index. The stock was up 26 cents at $43.16 in Tuesday morning trade on the New York Stock Exchange.

After the company reported second-quarter results in July, analysts said they were concerned that State Street's key capital ratios would suffer under new Basel III regulatory requirements.

State Street, for example, estimated its Tier 1 common ratio at 9.8 percent, disappointing some analysts.

On Tuesday, Hooley said that estimate was lower than it should have been. He said the new estimate is 11 percent, as of June 30.

As State Street Chief Financial Officer Ed Resch explained, the company miscalculated the key capital ratio by applying a higher than appropriate increase in risk-weighted assets.

In another development that investors might see as positive, Hooley said the "noise" over lawsuits that accuse the bank of overcharging on foreign exchange trades has died down. State Street has denied any wrongdoing in lawsuits brought against the company by pension fund clients and U.S. authorities.