State Street's (STT) earning results for fourth-quarter 2011 (4Q'11) were softer than anticipated by Fitch Ratings compared to the sequential quarter. STT reported net income of $381 million in 4Q'11, down from $555 million in 3Q'11, but up from $83 million at YE2010. These earnings are less than expected even considering the company's restructuring charges that weighed on the bottom line.
STT's overall 4Q'11 revenue declined 4.6% from the sequential quarter, as fee revenue declined 10% amid clients' de-risking decisions given current market uncertainties, as well as reduced foreign exchange trading and lower equity market valuations. Spread income grew 5% from the sequential quarter but continues to be negatively impacted by the unusually lower interest rate environment.
Expenses benefited by a 10% reduction in compensation and benefits costs but were also negatively impacted by an increase in acquisition and restructuring costs as STT continues to work to streamline its operations and business. Fitch anticipates STT will continue to focus on realizing some expense savings over the course of the next year.
Assets under custody and administration (AUCA) grew by 1.4% to $21.8 trillion in 4Q'11, with growth in U.S. assets of $484 billion, partially offset by a reduction in AUCA outside of the U.S. of $187 billion. Total assets under management (AUM) held relatively steady at $1.86 trillion in 4Q'11 compared to $1.87 trillion in 3Q'11. Growth in passively managed equities and exchange traded funds offset modest declines in passively managed fixed income and cash.
Balance sheet growth of 3.60% to $216.3 billion was driven by continued strong growth in core non-interest bearing deposits. While this is a positive from a funding perspective, given that these funds have been generally deposited with the Federal Reserve and are only earning 25 basis points, they have also served to weigh on the company's net interest margin (NIM). STT's fully taxable equivalent NIM was 1.55% in 4Q'11 compared to 1.56% in 3Q'11.
STT's capital position remains solid. Despite an increase in unrealized mark to market losses of $115 million on the investment portfolio due to widening spreads, the company's Tier 1 common ratio increased to 16.9% in 4Q'11 from 16% in 3Q11. Due to the balance sheet growth detailed above, however, the Tier 1 leverage ratio modestly declined to 7.3% in 4Q'11 from 7.8% in 3Q'11. Fitch notes that STT's Tier 1 common ratio and Tier 1 leverage ratio under Basel III are 12.1% and 5.6%, respectively at 4Q'11.
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