One of the tough things about being a publicly listed financial services firm is that every stock market announcement is studied by both shareholders and clients. The two have different agendas. State Street announced its global fourth quarter results last week and said it would focus on cost reduction in the coming year. That may be good for shareholders, but not necessarily for clients.
Another tough thing is that pesky journalists tend to look at top-line figures, such as assets under custody and administration. State Street has done very well in this regard, with a 4 per cent increase in the December quarter to US$34.4 trillion. This puts it just a fraction behind the world’s largest asset servicing bank, BNY Mellon. But BNY Mellon’s last-reported results were for the third quarter (the fourth quarter figures should be out in a week or two). As at the end of September, BNY Mellon had US$35.8 trillion under custody and administration. Anything could have happened.
Ron O’Hanley, State Street’s Boston-based chairman and chief executive, said in a broker earnings ‘call’ (phone link-up) last week that the firm’s overall pre-tax profit margin increased, which included an improvement in margin for the funds management arm, SSGA. A big component of his comments to brokers and investors was devoted to cost savings.
For the overall result, he said: “This also reflected the impact from the still-elevated level of industry servicing fee pricing pressure, which moderated for us in the second half of the year. As a result of these headwinds, it was clear that we needed to take aggressive management actions to stabilise revenues and reduce expenses while keeping client satisfaction at the centre of all we do. I am pleased with the progress we made and how that translated into results, particularly in the second half of the year.”
He reiterated: “Assets under custody and administration increased 4 per cent quarter-over-quarter to a record US$34.4 trillion. We saw a strong level of new wins during the quarter, totalling US$294 billion, which took our total wins in 2019 to just over US$1.8 trillion, within touching distance of our record amount of wins in 2018. Assets yet to be installed stood at US$1.2 trillion at quarter-end. At Global Advisors, assets under management increased 6 per cent quarter-over-quarter to a record $3.1 trillion supported by higher period-end market levels and strong US and European net flows to our SPDR range of ETFs…
“During 2019, we undertook significant actions to improve our operational efficiency and reduce expenses. This time last year, we launched a comprehensive firm-wide expense savings program to aggressively manage down expenses driven by new resource discipline, process re-engineering, and automation efforts. Initially targeting US$350 million of gross expense saves, we subsequently increased our expense savings target to US$400 million, which we exceeded, finishing the year at US$415 million in gross expense savings. Part of our efforts were aimed at tackling headcount growth, which has been too high for too many years. During 2019, we successfully reduced total headcount by 3 per cent from year-end 2018, driven by automation and standardisation as well as process re-engineering, with high cost-location headcount down by over 3,400. As a result, we reduced our full year 2019 expenses, excluding notable items in CRD, by almost 2 per cent, thus exceeding our initial target of one per cent.
“As we look to 2020, we remain focused on reducing our total expense base again. This past December, I outlined the outcome of the initial reassessment of our technology cost structure. In the coming year, we are targeting a change in the trajectory of our IT expenditure, aiming for it to be flat to-down 2 percent during 2020, excluding notable items. For resource discipline and process re-engineering efforts, we are also targeting a reduction of total expenses company-wide, excluding notable items, by approximately 1 per cent during 2020.’’
Greg Bright is publisher of Investor Strategy News (Australia)