A plunge in global stock markets earlier this year has been attributed to State Street's revenue drag. Image: Bloomberg

(Bloomberg) — State Street, which is expanding into higher fee ETFs, said first-quarter profit dropped 14% as volatile markets hurt fees.

Net income decreased to $319 million, or 79 cents a share, from $373 million, or 89 cents, a year earlier, the custody bank and asset manager said Wednesday. The results missed the 86 cents a share average estimate by 10 analysts surveyed by Bloomberg.

The plunge in global stock markets early in the first quarter was a drag on State Street's fee revenue, which dropped 4.1% to $1.97 billion. Chief Executive Officer Jay Hooley was able to bring down costs in a challenging environment of low interest rates and regulatory changes. Expenses fell 2.2% to $2 billion from the prior year.

State Street has accelerated cost cuts through a technology transformation program, which involved job cuts announced in October. The firm expects to deliver at least $100 million in annualized savings from the program this year.

BNY Mellon and Northern Trust earlier reported an increase in first-quarter profit, helped by the Federal Reserve's interest rate hike in December. BNY Mellon posted a 5% jump while Northern Trust said it had a 4.8% gain.

The Fed's move gave a boost to State Street's interest revenue, which rose 5.1% to $539 million from the fourth quarter.

SHARES UNDERPERFORM

State Street's shares are down about 18% in the past 12 months, compared with a decline of 2% for BNY Mellon and a drop of less than 1% for Northern Trust.

Management fees declined 10.3% to $270 million from the year prior, while servicing fees declined 2.1% to $1.2 billion. This weighed on assets under management, which fell 6% to $2.3 trillion from the year before, while assets under custody and administration fell 5.4% to $26.9 trillion.

State Street's asset management business saw $13 billion in net inflows during the quarter. It is seeking to improve asset management after its ETF business lost ground to BlackRock and Vanguard Group. The bank has been pushing into more sophisticated products that charge higher fees, and directing the offerings more toward retail clients.

Earlier this month Massachusetts charged a unit of State Street with violating the state securities act, accusing it of overcharging custodial clients over a period of years. Secretary of the Commonwealth William Galvin said in a statement that State Street billed customers for secure electronic messages that contained concealed markups of as high as 1,900%.

State Street said in December it incorrectly invoiced at least $200 million in asset-servicing expenses to clients over a period of 18 years. The company said in a statement in April that it brought the matter to the attention of government authorities, including Galvin's office.

"We are committed to compensating affected clients fully, including interest," State Street said in the statement.

Custody banks keep records, track performance and lend securities for institutional investors.

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