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Rating:Three Things to Know From State Street's Q2 2013 Earnings Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, August 15, 2013

Three Things to Know From State Street's Q2 2013 Earnings

Reported by Casey Quinlan

State Street [profile] Corporation's second quarter earnings increased 19 percent and its profit rose from $0.98 a share a year earlier to $1.24 per adjusted per-share. Revenue went up 5.8 percent to $2.56 billion. AUM rose 12 percent to 2.14 trillion.

State Street surpassed analyst expectations of $1.19 a share in earnings and revenue of $2.54 billion, according to analysts polled by Thomson Reuters, reported The Wall Street Journal . State Street's buy rating and A- rating was reaffirmed by TheStreet's equities research analysts, writes WatchListNews.

MFWire found three important points to note from the Seeking Alpha transcript of State Street's earnings call.

POINT 1: After Ben Bernanke's comments and some moderation in the market, flows improved to positive on the equities side but flows are still negative on fixed income side.

POINT 2: U.S., Asia, with emphasis on Japan and Australia, have been strong markets for State Street, while business in Europe slows down.

POINT 3: One third of its cloud applications have been ported onto its new cloud computing system.

POINT 1: After Ben Bernanke's comments and some moderation in the market, flows improved to positive on the equities side but flows are still negative on fixed income side.
Robert Lee of Keefe, Bruyette, & Woods: I guess my first question, Jay, maybe going back to your comments about client behavior since, I guess, kind of mid-quarter, kind of reduced risk appetite. How should we be thinking about that at all about -- or how are you thinking about that in terms of how it could impact some revenue trends in asset servicing and elsewhere if clients are going to become a little less active, have a more conservative stance? I mean, certainly, that's going to have some in-term [ph] negative kind of fee connotations to it. Or what are your thoughts?

Joseph Hooley, chairman, CEO, and President of State Street: The second quarter, pre-Ben Bernanke's announcement, was -- the flows were pretty good, I would say, elevated from past years. Not as good as end of year and first part of 2013, but pretty good. And then the announcement came. There was a little bit of a selloff. And I always point, even though it's not the perfect proxy, if you look at U.S. fund flow data, you saw a retrenchment both in equities and fixed income instruments. Post that, there was some moderation.

Flows improved, but still negative on the fixed income side, improved to positive on the equity side. So I point that out just to say that I do believe that this year is different than the past couple of years with regard to investor confidence, but there's still some choppiness based on the interest rate environment and the signals that, largely, the market is getting from the Fed. So I would put it at, Rob, better than past years as far general flows, but still with some choppiness. And I suspect, given the mission the Fed has, that we'll continue to see some volatility in markets. I think as opposed to years past, I think there's a little bit more resilience in the market, so I wouldn't expect severe changes, but I think there could be some volatility.
POINT : U.S., Asia, with emphasis on Japan and Australia, have been strong markets for State Street, while business in Europe slows down.
Lee: Is it possible to get a little bit of color on maybe the complexion of, not so much the pipe, but maybe geography of where you're seeing new business flows?

Hooley: You saw the $200-ish billion in new asset servicing commitments be 2/3:1/3 U.S.:non-U.S., and I think that's been the trend the last couple of quarters. And I would say that the simple explanation for that, and nothing's ever simple, is that Europe has really slowed down. I think that, while I think it will restart and I think that decision cycles will pick up, for the last several quarters, I think, somewhat as a result of the continued disruption in Europe, the decision-making around European new business has been slow.

We have a big presence in Europe. I would say in contrast to that, in addition to the U.S., Asia, with a little bit of an emphasis on Japan and Australia, for us, continue to be strong markets. I think if you look at it across product areas, I continue to call out the alternatives and, more specifically, hedge fund, where we think we have an advantaged position that the assets continue to grow, and there continues to be more outsourcing in that space.
POINT 3: One third of its cloud applications have been ported onto its new cloud computing system.
Edward Maguire of Credit Agricole Securities: You guys have talked quite a bit about your cloud project, which is a multiyear effort. And we'd be interested just to get your perspective on how that's tracked relative to your expectations. And also address some of the direct business benefits that you've been getting from the implementation of the technology and, potentially, some of the challenges you might have had in getting it right.

Hooley: And if you look at where we are in the migration of IT and Ops, most of the operational-related transformation has occurred or is winding up. And where we are right now, if you look at the -- from here to the end of the program, it's largely around rewriting applications in the cloud. And the rewriting of applications makes the function more efficient, but it also results in us having more of our application set in a cloud environment. And I think today, of 200 applications, Ed, there's probably 1/3 that are ported onto the cloud already.

So we've made headway. We feel good about where we're heading. The impact of the cloud, I think, is the transformational aspect of, when we say an IT and Ops Transformation, of this initiative. Because I -- when you look at this business, transaction processing technology is a huge enabler, and I think cloud computing is a real breakthrough, generally, but specifically to the transaction processing business. And I say that for a few reasons. It's less about the application rewrite and the efficiency it has on the operations. It's more around, once you move to a cloud environment, the nimbleness and speed to market to introduce new products.
See Seeking Alpha's transcript of State Street's earnings call and the earnings release for more on how State Street is doing.  

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