Shares of State Street Corp. soared Tuesday when it reported earnings in line with analysts' expectations and unveiled an asset management acquisition. But Mellon Financial Corp. shares fell after the company reported earnings and a deal to sell its retail operations.
State Street reported a 12.8% profit rise from a year earlier, to $167 million, or 50 cents per share. In an investor conference call, chief financial officer Ronald L. O'Kelley said that revenue from new business and securities lending offset a decline in market revenue. The Boston-based company said fee revenue rose 11.4%, to $731 million, while servicing fees increased 16.6%, to $422 million.
On Tuesday the company also announced that its asset management arm, State Street Global Advisors, had agreed to buy the passive equity business of Gartmore Investment Management PLC, a London investment management firm mostly owned by Nationwide Mutual Insurance Co. and with a wide range of British institutional clients. The price was not disclosed.
The deal would add $25 billion to State Street's current $727 billion under management, adding scale in a business that depends in large part on volume.
State Street stock rose 7.28%, but analysts said the Gartmore deal was not the reason. Instead they cited the earnings report and a rebound from a decline Monday, when Bank of New York Co., a competitor in the securities processing business, cautioned investors on its outlook for the rest of the year.
Bank of New York stock, which fell 12.95% Monday, fell again Tuesday, by 1.16%, despite an upgrade from James F. Mitchell of Putnam Lovell Securities Inc.
Mr. Mitchell upgraded his short-term rating to "buy" from "hold." He said that the selloff was overdone. "Bank of New York still has top market shares in global securities services," he wrote in a research note, and added that he continues to expect growth in the securities business.
Bank of New York had missed the analyst consensus on per-share earnings by a penny and cautiously guided investors to expect 8% growth for the full year if the market remains weak.
George A. Bicher, an analyst at Deutsche Banc Alex. Brown Inc., is also upbeat about Bank of New York. "Despite this revenue pressure, the business model is not broken," he wrote in a research note issued Tuesday.
Other analysts generally agreed that the securities processing banks are still a good investment. Indeed, Mark Fitzgibbon of Sandler O'Neill & Partners LP said Mellon's plans to sell part of its traditional banking business, including its retail branches, to Citizens Financial Group of Providence, R.I., in deal announced Tuesday is smart move. (See story, page 1.)
In a busy day for commercial banking results, Pittsburgh-based Mellon also reported operating earnings of 55 cents for the second quarter. (See story, page 4.)
While most analysts are said to agree that selling parts of its operations could be positive for Mellon in the long run, some expressed doubts.
Diana Yates of A.G. Edwards & Sons Inc. in St. Louis said that though Mellon is shedding some its credit risk in selling off certain business lines, it will face a lot of competition in the business of managing money for affluent customers.
Michael L. Mayo of Prudential Securities said the Mellon had always talked about cross-selling its Dreyfus mutual funds to retail bank customers and now would not have that opportunity. He questioned whether now is the right moment to pursue a change in strategy.
He also said that the sale would dilute earnings.
Mellon stock fell 4.81%.