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State Street’s earnings rise as fee revenue increases

State Street Corp. said first-quarter profit rose 5.9 percent on higher fee revenue and income from foreign exchange trading.

Net income increased to $377 million, or 90 cents a share, from $356 million, or 81 cents, a year earlier, the company said Friday in Boston. Earnings missed the $1.09 a share estimate of nine analysts surveyed by Bloomberg.

State Street’s Chief Executive Officer Joseph Hooley has relied on a combination of cost savings and stock-market gains to overcome the impact of low interest rates, which hurt income from lending and investing. State Street last month hired Ronald O’Hanley, the former head of Fidelity Investments’ asset management business, to head the firm’s $2.4 trillion money management business. Once the top provider of exchange-traded funds, the unit lost ground in recent years to BlackRock Inc. and Vanguard Group Inc.

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“You are seeing a trend of money flowing from active to passive, but State Street isn’t seeing as much of the benefit from that,” Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods Inc., said in an interview before earnings were released.

State Street shares rose $1.54, or 2 percent, in Friday morning trading on the New York Stock Exchange. The shares have declined 0.4 percent so far this year, compared with a 5 percent gain for rival Bank of New York Mellon Corp. and a 2.1 percent increase for the 18 member Standard & Poor’s index of asset managers and custody banks.

Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.

BNY Mellon this week reported a 16 percent increase in first-quarter profit to $766 million, as the stock market rally lifted assets and fees for overseeing them, and expenses declined.

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“Custody banks are deploying excess cash in higher yielding securities and loans so their net interest margins have been better than expected this quarter,” said Kleinhanzl.

While US policymakers have indicated they may start raising interest rates this year, the European Central Bank has embarked on a quantitative easing program, pushing interest rates and the euro lower. State Street and Bank of New York Mellon said earlier this year that a falling euro is cutting revenue from the region.

State Street’s asset management division lost the top spot in US ETFs to iShares, now a unit of BlackRock, in 2003 and this year was overtaken as the No. 2 by Vanguard, which has used lower costs to attract investors.

The firm last quarter started the SPDR DoubleLine Total Return Tactical ETF, an actively managed bond ETF run by star bond managers Jeffrey Gundlach and Philip Barach at DoubleLine Capital. The fund started trading on Feb. 24 and has $386 million in assets. It’s competing with funds such as the Pimco Total Return Active ETF, which has $2.7 billion in assets.

Scott Powers, who has run the money management business since 2008, plans to retire later this year. O’Hanley, who stepped down last year from his role at Fidelity, will start taking over responsibilities from Powers this month.

State Street opened the first US ETF in 1993. SPDR S&P 500 ETF Trust is still the largest ETF with about $186 billion.