State Street Beats the Street

Custody bank State Street (NYSE: STT  ) recently beat Wall Street estimates with a second-quarter earnings increase of almost 15%. However, in spite of the estimate-topping numbers, the Boston-based bank saw its shares drop more than 2% after it announced plans to shed nearly 850 jobs.

Higher quarterly earnings have been a general trend among custodian banks this quarter. For instance, State Street peers Bank of New York Mellon (NYSE: BK  ) and SunTrust Banks (NYSE: STI  ) saw their earnings rise on the back of higher fee revenues. Let's delve a little deeper into State Street's numbers and see what caused the drop in shares.

A look at the numbers
Revenues for the quarter increased 8%, to $2.47 billion from $2.30 billion a year ago. This was aided by a 17% increase in non-interest income to $1.92 billion due to a boost in record keeping and investments services.

The company reported higher operating expenses during the quarter as salaries and employee benefits rose to $1 billion, from $849 million, up 19% year over year. Clearly, higher costs weighed on the company's operations; as a result, State Street announced plans to cut nearly 850 jobs, about 3% of its global workforce, in the next 20 months. The bank laid off nearly 1,400 workers last year in an attempt to trim costs. Keeping a lid on costs is fine, but how long can State Street keep laying off workers to help combat rising expenses?

State Street's assets under management increased to $2.12 trillion, up 15% from the year-ago period. This increase reflects its acquisition of Bank of Ireland's (NYSE: IRE  ) asset management business. The company's capital strength remains robust. Its Tier 1 capital ratio increased to 18.9% from 15.1% last year, well above the required 8% minimum. The company clearly has a strong balance sheet under its belt.

The Foolish bottom line
State Street's numbers do make for impressive reading, and its sturdy capital base leaves the company on solid ground for the remainder of the year. But banks still face the pressures of low interest rates, which will have some impact on revenues going forward. State Street needs to find a better way to combat higher expenses if it wants to maintain its earnings -- and it needs to do so quickly.