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State Street Sees Room for Further Growth in 2008


State Street Corp.'s top executive said that the Boston company plans to focus on adding customers, developing business and products through its investment management arm, and expanding internationally, and that he remains cautiously optimistic for growth the rest of this year.

"To continue to deliver positive operating leverage, we think that consistent performance carries the day," Ron Logue, State Street's chairman and CEO, said in an interview April 15 after his company reported first-quarter earnings. "We think that we have to think and act conservatively rather than just hoping optimistically."

Despite market conditions, State Street expects to hit the middle of its projected range of 10% to 15% for earnings growth this year, Logue said. He also expects revenue to grow 14% to 17%.

During the company's fourth-quarter earnings call in January, Logue said he thought results for last year would be at the lower end of those ranges.

Andrew Marquardt, an analyst with Fox-Pitt Kelton Cochran Caronia Waller, wrote in a research note that the guidance is unchanged from what Logue announced at State Street's analyst day in February.

"We expect this to be viewed negatively, as many likely anticipated not only a strong first quarter but raised guidance, given such a strong" quarter when State Street beat analyst expectations, Marquardt wrote.

Logue said during the conference call that State Street has built its reputation on being conservative.

"Fundamentally, our business is very strong, and when markets return, we expect to have strong revenue growth from our fund business, but the problem is we don't know when that is going to happen," he said. "It is important as a company to plan for the worst-case scenarios rather than the best-case scenarios. That strategy has enabled us to deliver positive operating leverage for 14 straight quarters."

Logue said he remains confident because in the first quarter, State Street's servicing fee revenue rose 34% from a year earlier, and asset management fee revenue rose 7%.

To maintain that growth, State Street plans to expand its asset management business internationally, develop additional active management products and services, continue to add customers to its asset servicing business, he said.

Currently 41% of State Street revenue comes from foreign customers, versus 39% a year ago. Logue said his goal is for State Street to get half of its revenue from foreign customers within the next five years.

"Internationally, Europe has had strong growth, but the rate of growth is increasing quickly in the Asia-Pacific region," he said. "We feel good about growing there."

Despite the market turmoil - or, according to analysts, perhaps because of it - State Street reported Tuesday that first-quarter net income increased 69% from a year earlier, to $530 million, or $1.35 a share, beating the average analyst estimates by 5 cents, according to those polled by Thomson Financial Inc. Revenue increased 52%, to $2.58 billion.

Gerard Cassidy, an analyst with Royal Bank of Canada's RBC Capital Markets Corp., wrote in a research note issued April 15 that State Street was able to beat estimates "due to better than anticipated global securities lending and a blowout quarter in net interest margin expansion that continues to provide a boost to EPS, given the larger balance sheet following the Investors Financial Services Corp. acquisition."

Logue said that in the quarter State Street also added custody clients, and that rate cuts by the Federal Reserve Board increased lending fees. State Street added $600 billion of business in the first quarter that it expects to convert by the end of this quarter, he said, and it converted $800 billion of new business during the fourth and first quarters.

"Strong flows in terms of new business on the servicing side continue to fuel growth," he said.

State Street's results included a charge of $17 million, or 4 cents a share, associated with the July acquisition of Investors Financial Services Corp. The acquisition added $220 million to State Street's first-quarter revenue. Logue said the company is "40% to 50%" of the way through the conversion of Investors Financial and has retained 91% of those customers.

Fees generated by its investment arm, State Street Global Advisors, rose 7%, to $278 million, as assets under management rose 6%, to $1.955 trillion, and assets under custody rose 21%, to $14.9 trillion.

This month the company said it hired Scott Powers from the U.S. arm of Old Mutual PLC as the president and CEO of State Street Global Advisors. Powers, 48, succeeded James S. Phalen, who has been the interim president and CEO since January, when William W. Hunt resigned after bond funds posted losses.

Logue said he has been impressed with how the unit has rebounded this year. In the first quarter, it added a net total of $69 billion of assets. He said a strong driver for growth has been the development of its ETF business and the addition of more active investment strategies.

Not all of State Street's growth will come from "passive investments," he said. "We have been evolving to use more active strategies and increasing our share in the ETF market. This isn't anything brand new, but it is getting to where it is a considerable."

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