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UPDATE 3-State Street Q3 results find growth in distress

* Tax benefit lifts earnings by 18 cents a shareOct 18 (Reuters) - State Street Corp reported on Tuesday third-quarter results that topped Wall Street estimates, on strong gains from investment management fees and foreign currency trading, lifting its shares 6 percent.State Street Chief Executive Jay Hooley also said his company has taken advantage of distress in global financial markets as clients outsource more activities to reduce their expenses.”I would say that the other side of this depressed environment is that it is good for business because our customers, whether they’re pension funds, investment managers or alternative managers, are looking for some relief around either expense or responding to new regulatory reporting,” Hooley said on a conference call. “So the core business is good.”Boston-based State Street, the world’s third-largest institutional investor, reported net income of $543 million, or $1.10 a share. That compared with $540 million, or $1.08 a share, in the year-before period.Analysts, on average, had been looking for State Street to earn 88 cents a share, according to estimates compiled by Thomson Reuters I/B/E/S. State Street said its results included a benefit of 18 cents a share from restructuring conduit assets.Shares of State Street rose $2.13, or 6.3 percent, to $36.00, in New York Stock Exchange trading.Revenue in the third quarter was $2.43 billion, up 5 percent from $2.3 billion in the year-earlier period. Investment management fees generated by State Street Global Advisors rose 17 percent to $229 million from year-ago levels.Nomura analyst Glenn Schorr said in a research note that new business wins helped State Street offset declines in assets under custody and administration. Those assets totaled $21.5 trillion at the end of September, down from $22.8 trillion at the end of June.Before the results were released, analysts had been downbeat about the prospects for State Street and other U.S. custody banks because of ultra-low interest rates and depressed stock market levels.State Street Global, whose SPDR Gold exchange-traded fund was recently the world’s largest ETF, experienced negative net flows of $15 billion in the quarter.Meanwhile, State Street is under pressure from billionaire investor Nelson Peltz, whose Trian Partners says the company has sacrificed profits for revenue growth. In a critique of State Street operations, Trian said the company’s employee compensation expenses are too high. But in the third quarter, State Street said salary and employee benefit costs fell 4.4 percent from the previous three months.On the conference call, Hooley declined to take any questions about Trian’s unflattering analysis of State Street.”The thing that pleases me … is that we continue to grow our core revenue through the course of the financial crisis,” Hooley told Reuters during a telephone interview.RBC Capital Markets analyst Gerard Cassidy said, however, that higher growth assumptions from cross-selling lucrative services such as foreign exchange trading and securities lending have changed for U.S. custody banks.In addition, Cassidy said there is enormous pressure on the industry’s net interest margin in an environment of ultra-low interest rates. Indeed, State Street’s third-quarter net interest revenue was $578 million, a 20 percent drop from year-earlier levels.Before the earnings release, State Street shares were down 27 percent this year, underperforming the 4.5 percent decline of the Standard & Poor’s 500 Index.