State Street Corp. reported on Tuesday that its third-quarter profit rose 29% from a year earlier, and it gave a more optimistic outlook for a recently acquired business.
The Boston company said its quarterly earnings rose to $358 million, or 91 cents a share, from $278 million, or 83 cents a share the year earlier. State Street's quarterly results included merger and integration costs of $141 million, or 24 cents a share, from the acquisition of Investors Financial Services Corp, which it bought on July 2.
Excluding those costs, per share earnings came to $1.15, well above the 94 cents analysts had expected on average, according to Thomson Financial.
Revenue rose nearly 50%, to $2.2 billion, the company said. Wall Street had forecast revenue of $2 billion. Expenses totaled $1.6 billion, up 42% from a year earlier, not including the costs associated with Investors Financial.
"The fixed-income markets have experienced unprecedented disruption in this past quarter," said chief executive Ronald Logue in the earnings release. "We believe we are well-positioned with both our portfolio and our asset-backed commercial paper conduits."
State Street and other banking companies have faced pressure over their exposure to off-balance-sheet conduits that issue asset-backed commercial paper. Investors have been uneasy over potential losses associated with these less transparent structured investment vehicles since the market for commercial paper dried up.
"While liquidity in the fixed-income market remains challenging, our concentration in high-quality assets in our own portfolios, as well as in the conduits, ha[s] limited the impact of this disruption on our business," Mr. Logue said.
"We believe that we weathered the disruption in the fixed-income market well, without significantly affecting State Street's results," he said.
However, he added that the company was "disappointed in the performance of a small number of fixed-income strategies at State Street Global Advisors which performed below our expectation."
A Prudential Financial Inc. subsidiary has sued State Street over losses in retirement plans it manages that invested in State Street fixed-income funds. There have also been media reports that State Street may face legal action by attorneys general in Alaska and Idaho related to losses in their retirement funds.
State Street said servicing fees rose 37% in the third quarter from a year earlier, to $937 million, and investment management fees at State Street Global Advisors grew 26%, to $299 million.
The company said it won $825 billion of assets in new servicing business and $26 billion of net new business in asset management, compared with the year earlier.
It said it now expects this year's dilution as a result of the Investors Financial purchase to be about 6 cents a share, less than half as much as originally forecast. It expects the acquisition to be "modestly accretive" in 2008.
"Our improved outlook is due to our success in retaining revenue, converting accounts, and reducing costs," Mr. Logue said.
State Street said it expects — if markets remain "relatively stable" — to exceed the top ranges it had projected for the year for growth in per-share earnings, revenue, and return on equity.
