State Street Corp., a niche company with a large processing business that caters to institutional investors, is aggressively expanding overseas by exporting its technology and experience.

Europe is high on the agenda, and Japan is also of interest, according to Marshall N. Carter, chairman and chief executive officer.

"We have to go global," Mr. Carter said. "While the American market for pensions and investments is the deepest, widest, most innovative in the world, there is a limit to the market share you can gain."

State Street, with assets of $47.1 billion, is among the most profitable banking companies in the United States. Its net income soared 15% in 1998, to $436 million, on the strength of revenues from its three core businesses-securities processing, asset management, and treasury services. Return on equity last year reached 20.20%, compared with an average of 17.49% for its peer group.

Founded as a commercial bank in 1792, State Street has evolved away from traditional deposit-taking and lending. A small commercial loan portfolio of $2.2 billion is all that remains.

Executives now characterize it as part bank, part technology company. "We would be a lesser institution if we were just one or the other," said David Spina, president and chief operating officer.

Billions in technology investments over the last decade have helped State Street build a commanding market presence. With $4.8 trillion of assets under administration, it is the nation's second-largest asset custodian, after Chase Manhattan Corp. It also ranks as the country's third-largest asset manager, with $500 billion under management.

Analysts said the bank has a 40% market share among servicers to the U.S. mutual fund industry, the largest of any company. It also has a large share-30%-of the market for servicing public funds.

"Those leadership positions are what distinguish them," said Sally Pope Davis, an analyst at Goldman, Sachs & Co. "They are completely focused on institutional investors."

Leveraging this strong foundation, State Street is taking its technological prowess abroad, where changing regulations are creating a rapidly growing mutual fund and pension industry.

"We've actually changed our business mission," Mr. Carter said. "The new mission is to combine information technology with banking, money management, and securities processing skills. But we have information technology skills listed first."

A number of trends have emerged to make State Street's global expansion possible, executives said. For one, there is growing demand for global asset management capabilities. For another, more complex investment strategies have created the need for more specialized administrative and custodial services.

State Street already has operations in 24 countries, most of them set up to support the bank's asset management business.

Revenues from overseas have grown steadily since Mr. Carter's arrival at the bank from Chase Manhattan in 1991. At that time, business abroad accounted for 11% of total revenues. Last year foreign operations contributed 24% of total revenues. The goal, Mr. Carter said, is to have 30% to 40% of total revenues come from overseas soon after 2000.

The bank set up a processing facility in Luxembourg in 1990 with 250 employees and is opening another affiliate in the Netherlands. It already has 400 employees in its London affiliate.

Executives said they are moving into countries as regulations change regarding mutual funds and other commingled investment funds. Ronald E. Logue, State Street's executive vice president and head of global investor services, said the company is "taking the rifle-shot approach," aiming at one market at a time.

As State Street expands its processing business around the world, it follows the same formula it used to establish its global asset management presence: hiring local whenever it can.

"We are sending training cadres overseas, but we are not trying to transplant the U.S. way," Mr. Logue said. "Every market is different."

"As the cultures change and regulations become more open, that will allow in more U.S. competitors like us," he added.

The bank's rivals contend they are much farther along. Chase Manhattan has $1.8 trillion of assets under administration overseas, Bank of New York Co. has more than $800 billion, and State Street has just over $362 billion.

"We've got a lot of leg up there," said Thomas J. Perna, senior executive vice president at Bank of New York, which has 1,200 processing employees in Brussels and London, and sales offices spread throughout Europe.

State Street's Mr. Spina said the expansion effort will get easier as the bank gains recognition and acceptance in the European market. Mr. Carter acknowledged that the company is "brand challenged."

"We've moved pretty far along," Mr. Spina said, pointing to a recent coup in Switzerland, where the bank won custody business and five insurance company clients away from a Swiss bank.

"We are gaining acceptance by how we bring product and services to the market," he added.

State Street is intent on bulking up overseas without a major acquisition, unlike some of its competitors. Last year Chase acquired the $400 billion-asset global custody portfolio of Morgan Stanley Dean Witter & Co.

"The board has talked about megadeals," Mr. Spina said. "But with big acquisitions like those, you tend to get an inward focus. We are in a period of record growth. And we have a rapidly changing market in Europe to adapt to. We can't take two years out to complete a deal."

The bank's high profitability ratios-returns on equity have hovered around 20% for the last several years-have protected State Street from the acquisition battles swirling around it.

Just this week, Fleet Financial Group and BankBoston Corp. announced a $16 billion combination to form New England's largest corporate and consumer banking company.

State Street has found itself consistently fielding the advances of larger suitors, but the bank's management, board, and shareholders have not shown a willingness to sell.

In 1997 Bank of New York sought to acquire up to 10% of State Street's stock, in what was considered by many to be a precursor to a takeover, but Bank of New York, facing a battle with Massachusetts banking regulators, backed down.

Competitors say State Street, with a market capitalization of $13.8 billion, is at a disadvantage because it does not have the size to support the growth of its business.

"The big advantage we have over State Street is capital strength," Mr. Perna said. Bank of New York has a market cap of $29.1 billion and a balance sheet with $64 billion of assets, two characteristics that allow it to make acquisitions and invest in new technologies, Mr. Perna added.

Ms. Davis from Goldman, Sachs & Co. said State Street's relatively small size is not a hindrance. "Having a larger balance sheet can be good in this business, but I haven't seen any evidence that State Street has been constrained."

However, Mr. Carter and other State Street executives acknowledge that the bank's small size makes it a target. "As competitors get bigger and bigger, that may increase our vulnerability," Mr. Carter said.

"We've made it pretty clear that we're not for sale," he added. "Our market and our customers want us to be independent."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.