State Street Corporation today announced 2005 fourth-quarter earnings per share from continuing operations of $0.74, or net income of $249 million and revenue of $1.4 billion. Earnings per share and net income both increased 35% versus the 2004 fourth quarterâs results of $0.55 per share or net income of $184 million. Revenue is $1.3 billion in the fourth quarter of 2004. The 2004 fourth-quarter results include $12 million, or $0.02 per share, for merger and integration charges associated with the acquisition of a substantial portion of the Deutsche Bank Global Securities Servicing (GSS) business. For the fourth quarter of 2005, return on stockholdersâ equity from continuing operations is 15.9%, and compares to 11.9% in the fourth quarter of 2004.
For the full year, net income from continuing operations in 2005 amounts to $2.82 per share or net income from continuing operations of $945 million, compared to $2.35 per share, or $798 million in 2004. The results for 2004 include $62 million, or $.12 per share, for merger and integration charges associated with the GSS acquisition. Earnings per share from continuing operations of $2.82 in 2005 are up 14% from operating earnings per share of $2.47 in 2004. Return on equity from continuing operations in 2005 is 15.3% and compares with return on equity on a reported basis of 13.3% in 2004. On an operating basis, return on equity was 14.0% in 2004.
Revenue, including taxable-equivalent net interest revenue, is up 10%, from $5.0 billion in 2004 to a record level of $5.5 billion in 2005. Operating expenses in 2005 are $4.0 billion, an increase of 8% from $3.8 billion for 2004 on a reported basis and up 9% from $3.7 billion on an operating basis.
Commenting on the performance, Ronald E. Logue, State Street's chairman and chief executive officer, said, "Iâm pleased that we achieved the financial goals we set last year. In 2005 State Street again demonstrated its ability to grow its operating revenueâup 10% from 2004. Earnings per share from continuing operations are up 14% from operating earnings in 2004, exceeding our outlook. We also improved our return on equity from continuing operations to 15.3%. I am also pleased we met our objective to achieve positive operating leverage on an annual basis. State Street Global Advisors, our investment management arm, exhibited continued growth and is becoming a more meaningful contributor to State Streetâs results. Additionally, the Corporationâs non-US revenue increased 17% and now represents 39% of total revenue, moving toward our goal of 50% over several years.â
Logue added, âDuring 2006 we will build on the success of 2005 which included several large new customer wins. We are managing our balance sheet more effectively within prudent risk parameters, but the interest-rate environment will continue to be challenging. We continue to target positive operating leverage, not necessarily every quarter, but certainly on an annual basis.â
Logue concluded, âWe are setting 2006 financial goals of revenue growth of 8% to 12% and earnings per share growth of 10% to 15%. We expect return on equity to be between 14% and 17%. Our 2006 target is to achieve approximately the middle of those ranges.â
State Street purchased approximately 4.9 million shares of its common stock during the fourth quarter at an average price of $57.09 per share. The Corporationâs remaining authorization to purchase shares is approximately 4.8 million shares.
FOURTH-QUARTER OPERATING RESULTS VS. YEAR-AGO QUARTER
Total revenue of $1.4 billion in the fourth quarter of 2005 is up from $1.3 billion or 11% from the fourth quarter of 2004.
Servicing fees are $637 million, up $67 million or 12%, from $570 million in the year-ago quarter. The increase is attributable to new business from existing and new clients and higher equity valuations in 2005. Total assets under custody are $10.1 trillion, a record level, up 7%, compared with $9.5 trillion in the year-ago quarter.
Management fees, generated by State Street Global Advisors, are $213 million, up $46 million, or 28%, compared to $167 million in the year-ago quarter. The increase in management fees reflects new business from existing and new clients and higher equity valuations in 2005. Total assets under management are at a record level, $1.44 trillion, up 6%, compared to $1.35 trillion in the previous year.
Average month-end values compared to the fourth quarter of 2004, are up 5% for both the S&P 500 Index and the NASDAQ; average month-end values for the MSCIÂ® EAFE IndexSM are up 12%. The total return of the Lehman US Aggregate bond index for the fourth quarter is 0.59%.
Trading services revenue, which includes foreign exchange trading revenue and brokerage services, is up 13%, from $161 million to $182 million. The increase is driven by higher volumes in foreign exchange, offset partially by lower volatility.
Securities finance revenue is $73 million in the quarter, compared to $58 million in the year-ago quarter, an increase of 26%. The increase reflects improved spreads as well as continuing strong demand for securities on loan.
Taxable-equivalent net interest revenue is $253 million, up 10% from $229 million in last yearâs fourth quarter. The increase is due to continued balance sheet repositioning and a higher level of customer deposits.
Total expenses of $1,039 million in the fourth quarter of 2005, are up 6% from expenses on an operating basis of $980 million in the fourth quarter of 2004. Salaries and employee benefits expenses increased $78 million from $511 million to $589 million, driven principally by salaries attributed to the full-year effect of the costs associated with the three large investment management operations outsourcing contracts signed in the second half of 2004 and new business. Higher incentive compensation due to improved performance also contributed to the increase. Transaction processing expense increased $14 million to $118 million due to sub-custody costs. Occupancy expenses of $89 million in 2005 compare to $101 million in 2004, which included a $16 million loss on a sub-tenant agreement. Other expenses increased $9 million to $121 million, driven primarily by the cost of professional services to support compliance requirements and growth initiatives.
The effective tax rate was 34% in the fourth quarters of 2005 and 2004.
FOURTH-QUARTER RESULTS VS. THIRD QUARTER
Fourth-quarter net income per share of $0.74 from continuing operations is down 1%, or $0.01, compared to third quarter net income per share from continuing operations of $0.75, which includes a gain of $16 million, or $0.03 per share due to the receipt of the final payment for the 2003 sale of State Streetâs Private Asset Management (PAM) business. Excluding this item, earnings per share from continuing operations are up 3%. Total revenue in the fourth quarter of $1.42 billion is up $28 million, or $44 million excluding the PAM gain, versus $1.39 billion in the third quarter. Total expenses in the fourth quarter of $1.04 billion are up $31 million compared to $1.01 billion in the third quarter.
Results reflect strength in servicing and management fee revenue, up 3% and 13% respectively. Trading services revenue is up 3% to $182 million due to strength in brokerage. Processing fees and other revenue declined 8% to $71 million. Salaries and employee benefits expense is up 4% due to higher salaries and increased incentive compensation expense. Transaction processing expense increased 6% due to sub-custody costs. Occupancy expense was down 7% due to lower operating costs.
FULL YEAR 2005 VS. 2004
Taxable-equivalent revenue increased 10% from $5.0 billion to $5.5 billion. Servicing fees are up 9%, increasing from $2.3 billion to $2.5 billion. Management fees increased 21%, from $623 million to $751 million. Trading services revenue increased 17%, from $595 million to $694 million and securities finance revenue is up 27%, from $259 million to $330 million. Processing fees and other revenue decreased 2%, from $308 million to $302 million. Taxable-equivalent net interest revenue is up 5%, from $904 million to $949 million.
Expenses increased 8%, from $3.8 billion to $4.0 billion, including increases of 14% to $2.2 billion in salaries and employee benefits expense. Transaction processing expense was up 13% to $449 million and occupancy expense increased 8% to $391 million. Other expenses increased 12% to $484 million and expenses for information systems and communications expense declined 8% to $486 million.