State Street said fourth-quarter profit fell 3.7% as expenses rose faster than revenue.
Net income decreased to $525 million, or $1.24 a share, from $545 million, or $1.22 a year earlier, the company said Friday in Boston. State Street's shares fell by the most in a year.
State Street's Chief Executive Joseph Hooley has relied on a combination of cost savings, including from job cuts, and stock-market gains, to overcome the negative impact of low interest rates, which hurt the ability of custody banks to earn money on lending and investing activities. The firm expects operating fee revenue to increase 4% to 7% in 2015 despite continuing pressure from regulatory compliance costs, according to a company presentation.
"We have seen other large-cap banks build legal reserves and pull forward expenses, and State Street may be no different," Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods, said in an interview before earnings were announced.
Expenses rose 7.6% from a year earlier to $1.99 billion, outpacing the 6.9% increase in revenue to $2.63 billion. State Street's costs for the fourth quarter included expenses from regulatory compliance initiatives, $29 million in processing costs for securities and $17 million associated with shutting its derivatives clearing and execution business, according to the presentation.
"Managing expenses and continuing to drive efficiencies remain ongoing priorities, despite continued pressure from regulatory costs," Hooley said.
Assets under custody and administration rose 2.8% from a year earlier to $28.2 trillion, and the money it manages for investors increased 4.4% to $2.4 trillion.
Revenue increased as higher assets boosted fees for overseeing and managing client money. The bank also benefited from trading foreign exchange, where revenue rose 34.4% to $168 million from the year earlier.
State Street expects operating-basis fee revenue to outpace expenses by at least 200 basis points compared to 2014, provided interest rates are higher, according to the presentation.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.