State Street’s Hooley Sees European Path to More Global Future

Date: Monday, March 1, 2010
Author: Bloomberg

State Street Corp. Chief Executive Officer Joseph “Jay” Hooley said he will seek acquisitions in Europe and Asia to help the third-largest custody bank lift earnings by as much as 15 percent annually.

“I’m determined to make us an even more global company,” Hooley, who is taking over as chief executive officer from Ronald Logue today, said in a Feb. 26 interview in Bloomberg’s Boston office. “More of our inherent opportunities lie outside the U.S.”

Hooley, competing with Bank of New York Mellon Corp. for market share as banks are selling off assets following the credit crisis, is betting demand for custody services will rise because more Europeans will need to invest for retirement to supplement state pensions. State Street made two European deals in December with the purchase of Mourant International Finance Administration in the U.K.’s Channel Islands and the securities- servicing unit of Italy’s Intesa Sanpaolo SpA.

Hooley, 52, said while 2010 will be a year of transition with operating earnings per share just “slightly above” 2009, expansion abroad as well as rising interest rates will help the company reach its long-term target of 10 percent to 15 percent growth. Logue over the past two years slashed 6 percent of jobs, cut the dividend and raised capital, as investments in mortgage- backed bonds led to a record loss in last year’s second quarter.

‘Right Time’

“He’s in a really good spot,” Kevin Conn, an equity analyst at Massachusetts Financial Services Co., the largest holder of State Street shares with 4.8 percent as of Dec. 31, according to regulatory filings tracked by Bloomberg. “They’ve put a lot behind them legally and they are in the trough, earnings wise. It’s the right time to take over.”

State Street has gained 3.2 percent this year in New York trading, compared with the 1 percent decline by Standard & Poor’s index of asset managers and custody banks. Assets under custody rose 14 percent in 2009 to $13.75 trillion and the amount of money it invests for clients increased 32 percent to $1.91 trillion.

Hooley, who has set a goal of doubling revenue from outside the U.S. within five years, said Europe’s “fractionalized” custody business is under pressure to consolidate because of the cost to invest in new technology and as banks struggle to meet tighter capital requirements following the financial crisis.

“Some of the custody components of universal banks in Europe will be deemed non-core and will likely trade,” said Hooley, a native of Massachusetts and a graduate of Boston College, who is scheduled to open a new office building in Dublin today. He said he’ll be able to outbid competitors if necessary because State Street can find more savings in integrating the operations it buys.

Intesa Deal

The company added hedge-fund and private-equity clients with $170 billion assets through the agreement to buy Mourant International, based in Jersey in the U.K.’s Channel Islands. The agreement to purchase the securities-servicing unit of Italy’s Intesa Sanpaolo for 1.28 billion euros ($1.74 billion) the same month brought in 343 billion euros in custody assets.

The Intesa deal included a long-term servicing contract with the bank’s money management unit, Eurizon Capital SGR SpA, Italy’s largest fund company, with 135 billion euros in assets. It accounts for 70 percent of the acquired business’s revenue.

Hooley declined to comment on other potential takeover targets, saying he’s generally on the lookout for custody operations owned by companies with successful asset management units. His trip to Europe this week will also take him to Luxembourg, Frankfurt and London.

Blow-Ups

Custody banks keep records, track performance and execute trades for institutional investors including mutual funds, pension funds and hedge funds. They also handle foreign exchange transactions and lend cash and securities.

Like its rivals, State Street also has an asset management unit, State Street Global Advisors. It operates mutual funds and investment accounts for institutions and wealthy individuals. SSgA is the world’s second-largest money manager for institutions.

Hooley said in meeting with customers he no longer has to address reputational issues stemming from blow-ups at some fixed-income funds beginning in 2007. The losses led to lawsuits from investors claiming State Street misled them about the funds’ investments. The bank eventually made payouts of more than $800 million to clients.

In a complaint settled Feb. 4, the Securities and Exchange Commission also accused the company of selectively warning some clients about a fund’s devalued holdings, allowing them to exit while leaving other customers to suffer losses.

‘Learned a Lot’

“The impact from a customer standpoint probably peaked in early ‘08,” Hooley said. “These things play out in courts and with regulators, but I think the marketplace has moved on.”

He said the company has “done the right thing” by making clients whole, reviewing and revising risk management practices, revising disclosure policies and by making a host of personnel changes at SSgA. Since 2007 SSgA has appointed a new CEO, general counsel, global chief investment officer and created the new position of chief risk officer.

“We learned a lot through that and have taken the actions necessary to correct things about our business that needed to be corrected,” he said.

Net new business at SSgA fell 22 percent to $248 billion in 2009 compared with the previous year.

The company also ran into trouble with investments in risky mortgages with its own money and in off-balance-sheet entities. Known as conduits, these vehicles bought long-term debt while issuing short-term debt, profiting from the margin between interest rates.

Conduits

The strategy, along with rising interest rates, helped nearly triple State Street’s net interest revenue to $2.65 billion in 2008 from 2005. When the value of the securities collapsed, it led to unrealized losses that peaked at $9.9 billion at the end of 2008. When those results were announced Jan. 20, 2009, the company’s shares plunged 59 percent.

“There seems to have been a period of excessive risk- taking,” Thomas McCrohan, an analyst with Janney Montgomery Scott LLC in Philadelphia, said in an interview.

State Street absorbed the conduits onto its balance sheet, wrote down the value of bond holdings by $3.7 billion and raised $2.5 billion in new capital in the second quarter of last year.

“There were lessons learned, not that I’d say specifically we’d do anything differently,” Hooley said.

Hooley said he is committed to re-instating State Street’s dividend to where it stood before. In an effort to bolster capital, Logue slashed the dividend to a penny from 24 cents, eliminated 2008 bonuses for top executives cut 1,700 jobs.

Hooley joined State Street in 1986, leaving in 1988 to head National Financial Data Services, the company’s joint venture with Kansas City-based DST Systems Inc., from 1988 to 2000. He returned to the parent company in 2000 to manage the global investment-servicing division. He became vice chairman in 2006 and chief operating office in 2008.