State Street's Next Quarter Should Be Good, Too

Custody banks took to cost-cutting measures to survive the low-interest-rate environment coupled with reserved capital market activity. One bank that benefited from such measures is State Street (NYSE: STT  ) , which saw its fourth-quarter profits rise.

State Street remained profitable by saving nearly $80 million last year through job cuts and technology upgrades. Like Bank of New York Mellon (NYSE: BK  ) , State Street cut jobs deeply -- 3,750 in all. Both banks are looking to save around $575 million a year by 2015.

Cost savings and an improving banking environment should help State Street post good figures in the upcoming quarter as well.

Asset growth and solid capital position
The company's last quarter was marred by a weak global market and cautious client behavior, resulting in a fall in top-line growth. However, State Street's assets under custody and administration, or AUC, rose slightly by 1% to $21.8 trillion from the year-ago period, reflecting an influx of new businesses. Similarly, peer BNY Mellon saw its AUC rise 3% to $25.8 trillion from the previous year. Fellow custody bank Northern Trust's (Nasdaq: NTRS  ) AUC rose by 4% to $4.3 trillion. The increase should come as good news to investors.

In the last quarter, State Street reported a Tier 1 capital ratio of 18.9%, indicating a strong capital position. It passed the recent round of stress tests quite comfortably and finished the second strongest after BNY Mellon. The stress tests showed that under the hypothetical scenario, State Street would have a Tier 1 capital ratio of 12.5% in the fourth quarter of 2013. BNY Mellon ended up with 13.1%, the highest among the 19 banks tested.

The tests not only proved that State Street has a strong capital position, but also gave the custodian bank the green light to increase its quarterly dividend by 33%.

A word of caution
While the increase in AUC shows that there is hope for the bank to improve its performance going forward, there is one thing that might work against State Street. Like fellow custodian bank BNY Mellon, State Street is facing lawsuit charges. Both are alleged to have overcharged clients on currency transactions. The latest lawsuit filed against them comes from the Ohio treasurer's office, which is looking to sever ties with them. The claims might lead to loss of business with a rise in scrutiny by customers into the company's pricing. This may in time affect the company's margins.

While investigations continue, State Street is defending itself against the claims. Aside from the suits, the custody bank looks strong: It has a healthy balance sheet and has raised its dividend payments. To add to the increase in dividends, State Street will buy back nearly $1.8 billion worth of its own shares through March 31, 2013. So I for one am not reading much into the lawsuits. The stock looks intriguing to me. If you'd like to stay up to speed on it, simply click here and add the stock to My Watchlist.

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Fool contributor Shubh Datta doesn't own shares in the companies listed above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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