State Street battles weak FX revenue, high compensation costs

Weak foreign exchange revenue persists at State Street Corp , hurting the custody bank's chances of lowering its high ratio of compensation expenses, top executives said on Tuesday.

Some shareholders, including activist investor Nelson Peltz, have criticized State Street's compensation-to-revenue ratio, saying it is too high.

State Street's goal is to keep the ratio at about 39 percent, compared with 40 percent in 2011. But that goal could be hard to meet as foreign currency trading revenue withers from slack volume and volatility while key customers shift away from transactions with higher profit margins.

State Street Chief Financial Officer Ed Resch said on Tuesday he expects the compensation-to-revenue ratio to be pressured, primarily because of weak trading revenue. He made his remarks during a presentation with State Street Chairman and Chief Executive Jay Hooley at the Bank of America Merrill Lynch Banking and Financial Services Conference in New York.

Meanwhile, State Street is battling a number of lawsuits that allege the bank overcharged clients on forex trades that were not negotiated. These so-called standing instruction trades had been a lucrative franchise for State Street. The bank denies any wrongdoing, but pension funds, for example, are now telling their investment managers to negotiate more forex trades and to do fewer standing instruction transactions.

State Street's third-quarter foreign exchange revenue dropped 44 percent to $115 million from the year-ago level of $204 million, partly because of the change in client behavior.

In a closely watched forex case, the Arkansas Teacher Retirement System and State Street entered into private mediation talks during two days in late October. But the $12 billion pension fund and the bank were unable to settle the case, lawyers said in a November 2 joint status report filed in U.S. District Court in Boston.

State Street shares were up 0.7 percent at $44.68 at midday on Tuesday. (Reporting by Tim McLaughlin in Boston; editing by Matthew Lewis)