Banking

State Street raises estimate of return on Brown Brothers Harriman deal

State Street offered both good news and bad news Wednesday about its pending acquisition of Brown Brothers Harriman Investor Services.

On the downside, completing the $3.5 billion deal is taking longer than State Street originally forecast. But when the deal finally closes, it will likely be more lucrative than initially anticipated.

The process of obtaining regulatory approvals “is proceeding at a slower pace than anticipated,” Chief Financial Officer Eric Aboaf said during a conference call with analysts. When the deal was announced last September, State Street said it was targeting a close by the end of 2021. On Wednesday, Aboaf said that an early second-quarter close is possible.

State Street, which stands to become the nation’s largest custody bank once its acquisition of Brown Brothers Harriman Investor Services closes, reported net income of $697 million during the fourth quarter.

Bloomberg

But State Street now expects 25% year-on-year growth in earnings before interest and taxes for each quarter in the first year after the deal closes, reflecting elevated stock prices and projected higher interest rates, according to Aboaf. That earnings growth projection is up from an initial estimate of 15%.

Acquiring Brown Brothers Harriman is expected to make State Street the number-one U.S. custody bank with pro forma assets under custody in excess of $37 trillion.

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Not surprisingly, integrating Brown Brothers Harriman ranks as a key objective for the Boston-based company in 2022. “The proposed acquisition is a financially compelling use of capital, and once closed it will strengthen our market leadership,” State Street CEO Ronald O’Hanley said during Wednesday’s conference call.

For the fourth quarter, State Street reported net income totaling $697 million, up 30% from the same three-month period in 2020. The company’s 2021 results were driven by record levels of fee income generated by its two biggest business lines, investment services and management.

State Street expects the momentum to continue in the first quarter, with servicing fees expected to grow 1%-2% and management fees projected to grow 8%-9%.

State Street’s results came a day after one of its biggest custody bank rivals, Bank of New York Mellon, reported fourth-quarter net income totaling $869 million.

State Street reported $1.38 billion in servicing fees for the quarter ending Dec. 31, up 6% from a year earlier. Fourth-quarter management fees totaled $530 million, up 8% year-over-year. Assets under custody or administration reached a record level of $43.7 trillion, and assets under management hit an all-time high of $4.1 trillion.

State Street reported revenue totaling $3.1 billion in the fourth quarter, up 5% year-over-year. The company is projecting top-line revenue growth of 2%-3% in the first quarter, “given equity market expectations and continued business momentum,” Aboaf said.

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Traditional banking activities’ contribution to State Street’s bottom line is comparatively modest — fourth-quarter net interest income of $484 million was actually down 3% from 2020 — but the company expects to achieve solid gains in 2022, with the Federal Reserve projected to hike interest rates on multiple occasions, beginning as early as March.

State Street, which reported earning assets of $303 billion at the end of 2021, is projecting 2022 net interest income growth of 10%-12%, according to Aboaf.

Along with its fourth-quarter results, State Street reported that Cyrus Taraporevala, who has led its asset management unit since 2016, plans to retire in 2022.

That unit, State Street Global Advisors, has experienced significant growth in earnings and assets under management under Taraporevala’s leadership. Assets under management are up nearly 50% since the end of 2017.

Taraporevala did not give a specific retirement date, and the company said he has agreed to stay on long enough to ensure a smooth transition to an as-yet unnamed successor.

“Having Cyrus continue to lead State Street Global Advisors and transition responsibilities to a successor will help ensure we build on its strong momentum,” O’Hanley said.


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