Peltz target State Street says third-quarter profit rose 11%

State Street Corp., the custody bank under pressure from activist investor Nelson Peltz to increase profitability, said third-quarter profit rose 11 percent, helped by cost-cutting and a takeover.

Net income on an operating basis increased to $476 million, or 96 cents a share, from $427 million, or 86 cents a shares, a year earlier, the Boston-based company said today in statement. Excluding certain items, 21 analysts surveyed by Bloomberg estimated average earnings of 89 cents a share.

Peltz, founder and chief executive officer of Trian Fund Management LP in New York, called on State Street in an Oct. 16 letter to make a clearer commitment to cost-cutting, put shareholder returns ahead of acquisitions and consider selling its money-management unit. Joseph “Jay” Hooley, the bank's chief executive officer, has sought to lower costs by announcing 2,250 job cuts in the past year, about 8 percent of its workforce and more than rivals Bank of New York Mellon Corp. and Northern Trust Corp.

Peltz's recommendations “will likely provide a boost to State Street shares and will now overshadow third-quarter results,” Andrew Marquardt, an analyst in New York for Evercore Partners Inc., wrote in a research note published yesterday.

Assets under custody rose 5.7 percent from a year earlier to $15.7 trillion, helping operating basis revenue increase 12 percent to $2.41 billion. The money State Street manages for investors decreased 4.2 percent to $1.88 trillion.

Expense Growth

Expense growth, a central complaint in Peltz's letter, exceeded the increase in sales as costs climbed 13 percent to $1.71 billion. Salaries and benefits rose 13 percent to $965 million.

Operating profit excludes money earned from the sale or maturing of bonds whose value was written down in May 2009, which the company records as “discount accretion” within net interest income. Discount accretion in the third quarter was $46 million, or 6 cents a share.

Net income in the quarter rose 0.6 percent to $543 million, or $1.10 a share, compared with $540 million, or $1.08 a share in the third quarter of 2010.

The results included a tax benefit of $91 million, or 18 cents a share, related to a restructuring of non-U.S. conduit assets.

‘Expensive' Acquisitions

State Street, the second-biggest independent custody bank, has struggled along with peers to increase profit amid volatile equity markets and record low interest rates, which reduce the returns they earn on investments and on the lending of cash and securities to institutional investors.

The U.S. Federal Reserve has held its benchmark lending rate at zero to 0.25 percent since December 2008 in an attempt to stimulate lending and economic growth.

Peltz, a billionaire whose firm owns 3.3 percent of State Street shares, criticized the bank for allowing costs to grow faster than sales, for making “very expensive” acquisitions and for reporting “recurring ‘non-recurring' charges” that, according to the letter, accounted for 30 percent of pretax earnings each year since 2007.

“While we agree with some of the detail of Trian Partners' assessments and action plans, we continue to think State Street management is handicapped by the current backdrop,” Brian Bedell, an analyst with ISI Group Inc. in New York, said in a research note published yesterday.

State Street said in a statement that it had “engaged in constructive discussions” with Trian over the past year.

Bank of Ireland

State Street acquired the Bank of Ireland's asset- management unit in January, helping to lessen the impact of falling equity markets. The MSCI AC World Index has declined 11 percent since the start of the year, reducing fees collected by custody banks on assets they safeguard and on investments they manage.

State Street and BNY Mellon, the largest custodian of financial assets, face a number of lawsuits from state attorneys general accusing them of fraudulently mispricing some foreign- exchange transactions performed for public pension funds. New York's attorney general and the U.S. Attorney's Office in Manhattan both filed civil suits against BNY Mellon on Oct. 4.

Legg Mason

Peltz takes stakes in companies and then frequently pushes for changes designed to boost their share prices. Best known for investments in consumer-oriented companies such as Kraft Foods Inc., ketchup maker H.J. Heinz Co. and luxury retailer Tiffany & Co., Peltz made a foray into financial services by joining Legg Mason Inc.'s board in 2009.

Since Peltz became a Legg Mason director, the asset- management firm has cut jobs and announced a restructuring plan to lift operating margins.

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.

Results were announced before the start of regular U.S. trading. State Street has declined 27 percent this year, compared with the 28 percent decrease by the Standard & Poor's 19-company index of asset managers and custody banks.

BNY Mellon and Chicago-based Northern Trust are scheduled to report earnings tomorrow.

(State Street is scheduled to hold a conference call for investors at 9:30 a.m. New York time. The call can be accessed at http://www.statestreet.com/stockholder and by telephone at +1-706-679-5594 or +1-800-642-1687 (Conference ID 36968947).)

--Editors: Christian Baumgaertel, Steven Crabill

To contact the reporter on this story: Christopher Condon in Boston at ccondon4bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertelbloomberg.net