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On Jun 17, 2013, we reiterated our long-term recommendation on State Street Corporation (STT - Analyst Report) at Neutral. Our decision rests on the company’s various restructuring programs, continuous acquisitions, sound capital deployment activities and solid first-quarter 2013 earnings. However, we remain concerned about State Street’s deteriorating net interest margin.

Why the Neutral Stance?

State Street's first-quarter 2013 operating earnings of 96 cents per share marginally surpassed the Zacks Consensus Estimate of 93 cents. This also compared favorably with the year-ago earnings of 84 cents. Better-than-expected results were aided by improvement in fee income, partially offset by higher operating expenses and lower net interest income. Also, asset position and capital ratios remained robust.

Following the result release, the Zacks Consensus Estimate went up by 2.0% to $4.54 per share over the last 60 days. Moreover, for 2014, the Zacks Consensus Estimate went up by 2.2% to $5.17 per share over the same time frame. The company currently has a Zacks Rank #3 (Hold).

In May 2013, State Street hiked its dividend by 8.3% to 26 cents per share, following the approval of its capital plan by the Federal Reserve. Additionally, the company announced a share repurchase program under which it would be able to buy back shares worth up to $2.1 billion through Mar 13, 2014.

State Street’s restructuring initiatives are expected to improve its efficiency. Moreover, a solid capital position and inorganic growth initiatives along with significant international exposure are expected to enhance its revenue generation capacity going forward.  

On the flip side, State Street’s escalating operating expenses and deteriorating net interest margin (NIM) are expected to hamper its bottom-line growth in the near future. Further, sluggish economic recovery, stringent regulations and low-interest rate environment can act as the dampeners.

Other Banks to Consider

Some better performing stocks include Enterprise Financial Services Corp. (EFSC - Snapshot Report), First Interstate Bancsystem Inc. (FIBK - Snapshot Report) and Old Second Bancorp Inc. (OSBC - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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