State Street set for decent summer after strong Q2

State Street set for decent summer after strong Q2

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State Street’s results stood out among the custody banks in the second quarter, according to analysts at Jefferies, after the firm showed cost control, strong new business wins and positive guidance.

Expenses were the story for the Boston-based bank between April and June, New York-based analyst Ken Usdin notes, with costs flat and a new flat total expense outlook for 2016.

Fees were also positive versus prior misses. Servicing fees rose 3.6% and management fees by 6.7%, offsetting smaller, but positive, securities lending fees and lower brokerage fees.

BNY Mellon also showed good cost control again in the quarter and management reduced 2016 cost guidance.

“Asset servicing was OK, but issuer services and FX fees were soft,” Jefferies’ Usdin added.

Core FX was lower for BNY Mellon on quarterly basis while issuer services was weaker as depositary receipt fees declined.

Meanwhile, Northern Trust’s core fees were helped by fee waiver recapture and the acquisition of institutional equity brokerage firm Aviant.

“The trust banks are waiting for the alignment of all three of their primary revenue drivers, with at least one remaining elusive each quarter,” Usdin added in his note to clients on Wednesday.

“Rate hike expectations have remained uncertain. Equity markets trended higher but transaction activity is lower again. New business wins are still decent in most core businesses, but the incremental focus is centered on cost control.”

Usdin, the head of the Jefferies Bank Research unit, reckons State Street is best positioned in the group for the third quarter, with asset management and custody both strongly positive, benefiting from the strong July rally. 

BNY Mellon is also in good shape with asset management, custody, and mutual funds all strongly positive, but with more fixed income vs. equities exposure. 

He claims Northern Trust is a "little less favorably positioned", although wealth management and asset management are nicely positive and the two are locked-in quarterly lagged comparisons. Custody is also positive, but less so. 

In aggregate, Usdin says FX and securities lending fee contributions are modestly bigger at State Street compared to BNY Mellon and Northern Trust.

He added that securities lending fees make up a small component of overall revenues today (1% at BNY Mellon, 2% at Northern Trust and 6% at State Street in the second quarter).

Historically, Jefferies statistics show securities lending is seasonally weaker in the third quarter, down 28% sequentially on average.

Usdin has placed a 'buy' rating on State Street shares and maintained his neutral stance on Northern Trust and BNY Mellon. 

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