(Bloomberg News) State Street Corp., the third-largest custody bank, said it will cut 1,400 jobs beginning this week and trim real estate costs as interest rates near zero erode profit.

The measures, which will pare State Street's workforce by 5%, are part of an effort to save as much as $625 million a year by the end of 2014, the Boston-based company said yesterday. State Street said it will book restructuring expenses of up to $450 million before taxes over four years.

"They're feeling the effect of the low interest-rate environment, and they want to show investors they will manage expenses as astutely as they can," Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, said in a telephone interview.

Chief Executive Officer Joseph "Jay" Hooley, who took over in March, has set a long-term goal of increasing earnings by 10% to 15% a year. With record-low interest rates eroding what the bank earns from lending and investing, State Street has made acquisitions to boost profit.

The company, which employs about 28,000 worldwide, eliminated 1,700 jobs in the first quarter of 2009, when it also cut bonuses and reduced its quarterly dividend from 24 cents a share to a penny.

"If your prices keep going down, the only way you can get profit up is to wait for interest rates to go up or get your costs down," Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Fla., said in a telephone interview.

BNY, Northern Trust

Bove said competition and increased use of technology has forced prices down for the services provided by State Street and its main rivals, Bank of New York Mellon Corp. and Chicago's Northern Trust Corp. Cassidy said he didn't expect State Street's actions would put pressure on BNY Mellon and Northern Trust also to reduce costs.

The job cuts will start this week and be completed by the end of next year, State Street said. About 400 positions will be eliminated in Massachusetts, where State Street employs 12,600, Carolyn Cichon, a spokeswoman for the company, said in a telephone interview. She declined to say where other cuts may be concentrated geographically.

The company plans to book as much as $165 million of the restructuring costs in the fourth quarter, mainly related to the workforce reductions. Measures will also include consolidating real estate to lower occupancy expenses and investments to increase computing capabilities, according to the statement.

Barclays Cuts

Barclays Capital, the securities unit of Barclays Plc, is preparing to eliminate hundreds of jobs in the next two months following a decline in investment banking revenue, according to three people familiar with the matter. A spokesman for Barclays in London declined to comment.

Custody banks make money in part by investing or lending out cash and securities deposited by clients that include mutual funds and pension funds. The margin between what they pay depositors and what they make from investments and lending narrows when interest rates decline.

The Federal Reserve has held its benchmark lending rate at between zero and 0.25% since December 2008. The rate won't rise above 0.5% until the first quarter of 2012, according to the average forecast of 41 analysts surveyed by Bloomberg.

"Amid the current challenging economic conditions, we will continue to improve our operating environment in the short-term while ensuring that we have the right structure in place for long-term growth," Hooley said in the statement.

Fees Suffer

State Street in October reported a 21% increase in third-quarter operating profit, boosted by two European acquisitions. Revenue from trading services, which includes foreign-exchange trading and brokerage fees, fell 15% to $228 million. Securities-finance revenue, hurt by low interest rates, declined 35% to $68 million.

Fees at State Street's money-management unit have also suffered as investors continued to shift from higher-earning equities to bonds. Clients at State Street Global Advisors withdrew a net $3 billion in the third quarter. Index-based investments, including exchange-traded funds, attracted $25 billion.

The company completed the purchases of Mourant International Finance Administration in the U.K.'s Channel Islands in April and the securities-servicing unit of Italy's Intesa Sanpaolo SpA in May. In October, State Street agreed to buy Bank of Ireland's investment-management business.

Its shares are little changed this year, compared with the 4.7% gain by Standard & Poor's index for money managers and custody banks.