State Street CEO: Growth to Slow, But Pipeline Solid

State Street Corp.'s top executive said market conditions will make it difficult for his Boston company to maintain its strong second-quarter growth, but he hopes to weather the second half by focusing on core businesses, cutting expenses, and attracting new customers. 

“We expect the uncharacteristic growth to moderate,” Ronald E. Logue, State Street’s chairman and chief executive officer, said in an interview Tuesday. “The foreign exchange growth has moderated, and we expect net interest margins to increase only slightly.”

He said he is confident State Street, which sold $2.8 billion of stock last month to raise capital, can add to earnings and avoid raising more capital. “Momentum is a key word for us in the second half,” Logue said. “I think you have seen us deliver strong core revenue growth. We have a strong pipeline of new business, strong wins, and strong retention, and these are all really good things. It gives us the momentum that we want.”

State Street said Tuesday its second-quarter profits increased 50% from a year earlier, to $548 million, or $1.35 a share, and its revenue increased 39.1%, to $2.7 billion. As a result, it raised its full-year profits and sales growth forecast to the high end of its 10% to 15% range and said revenue growth should exceed its 14% to 17% target.

Excluding costs from last year’s acquisition of Investors Financial Services Corp., State Street reported earnings of $1.40 a share, or 4 cents above the average Wall Street forecast, according to Thomson Reuters. Expenses rose 36%, to $1.84 billion. Excluding the Investors Financial acquisition expenses rose 22%. Mr. Logue said State Street needs to balance its expenses.

State Street’s core businesses continued to deliver strong results. Fee revenue increased 31%, to $2.01 billion. Servicing fees rose 28%, to $977 million, while securities-lending fees more than doubled, to $352 million. Asset management fees from State Street Global Advisors fell 1%, to $280 million, as assets under management fell 2%, to $1.89 trillion.

Logue said the investment management arm remains an important part of his company’s future. “I think we recovered relatively quickly with SSGA, because we responded quickly” to the asset and fee declines. “We replaced our fixed-income team within a week and replaced our CEO of this unit within a quarter. Things didn’t lose that much momentum there.”

In the short term, he said, State Street Global Advisors will get organic growth from its exchange-traded funds. “I think there will be a resurgence in passive investing, which will put us in a good position for growth. I don’t see us needing to buy anything to build this business.”

State Street’s pipeline is strong because there has been a “flight to quality,” Logue said. “Customers are making the decision to move their assets from traditional commercial banks with large loan portfolios. Cash balances continue to increase, and I expect that to increase over time. We are well positioned to take advantage of that, as history has proven.”

Analysts agreed some investors may move assets to companies like State Street. “Since State Street is not a lender in the traditional sense, it does not face the pressure from increased loan losses that we expect other banks to face in 2008,” David Ritter, an analyst with Argus Research Co., wrote in a note.

In the second quarter State Street added $400 billion of assets. It has added $400 billion to $600 billion in each of the past several quarters. Logue expects it to gain business as the trust and custody industry continues to consolidate. “I anticipate big banks with large loan portfolios may look to sell their trust and custody businesses to put money aside for loan-loss provisions,” Logue said. “We want to be positioned take advantage of that. It is really just a question of when.”