Low interest rates have hurt U.S. custody banks' ability to gain on lending and have reduced the number of lucrative investment opportunities. Therefore, pulling back on costs has been one of the few ways of propping up profits.

One bank that fits the bill is State Street (NYSE: STT). Reducing expenses helped its fourth-quarter profits climb.

Profits despite weak conditions
Total revenue dropped 5% on a sequential basis, reflecting the cautious nature of clients in the face of weak global markets. The company stated that the disorder in Europe has made clients increasingly risk-averse, affecting both servicing and investment management fees. They declined by 1% and 9%, respectively.

Nevertheless, the custody bank managed to save almost $80 million in 2011 through job cuts and technology upgrades. It plans to reduce expenses by around $170 million this year, according to Keefe Bruyette & Woods analyst Robert Lee. In the last 13 months, State Street and peer Bank of New York Mellon (NYSE: BK) have together cut or are expected to cut a total of 3,750 jobs as they aim to save $575 million a year by 2015.

These measures helped State Street witness a 6.7% decline in employee and compensation benefits. Earnings soared to $381 million from $83 million a year ago, even though last year's results were reduced by $500 million due to cost-cutting and technology-based expenses. On an operating basis, earnings grew 4%.

Some new business
While assets under management declined 7.2% on account of redemptions, State Street's assets under custody and administration rose slightly by 1% to $21.8 trillion from the year-ago period in the fourth quarter. The company attributed the rise to new businesses. Peer Bank of New York Mellon also has fared very well in this regard, and its assets under custody and administration rose 3% to $25.8 trillion from a year ago. Although fees have been flat across the board, the rise in AUC is definitely a positive.

The bank also reported a Tier 1 capital ratio of 18.9%, indicating a strong capital position. This, combined with the drive to boost profits, definitely puts State Street in a strong position for 2012. Do you agree?

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