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Why Is State Street (STT) Down 3.6% Since the Last Earnings Report?
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It has been about a month since the last earnings report for State Street Corporation (STT - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
State Street Q3 Earnings Beat, Revenues Improve Y/Y
Rise in interest income drove State Street’s third-quarter 2017 operating earnings of $1.71 per share, which handily outpaced the Zacks Consensus Estimate of $1.61. Also, the figure was up 26.7% year over year.
Higher net interest income (reflecting rise in interest rates) and fee income supported the results. Also, assets under custody and administration and assets under management (AUM) witnessed growth. However, an increase in operating expenses and lower trading servicing fees were the undermining factors.
After considering certain non-recurring items, net income available to common shareholders came in at $629 million or $1.66 per share compared with $507 million or $1.29 per share in the year-ago quarter.
Revenues Improve, Expenses Rise
Revenues, on a GAAP basis totaled $2.85 billion, increasing 8.6% from the prior-year quarter. However, the top line lagged the Zacks Consensus Estimate of $2.95 billion.
Net interest revenues, on an operating basis, jumped 20.1% from the year-ago quarter to $645 million. The rise was mainly driven by higher interest rates, lower wholesale CD balances and disciplined liability pricing. Also, net interest margin increased 29 basis points year over year to 1.35%.
Fee revenues grew 4.9% from the prior-year quarter to $2.32 billion. All components of fee income showed improvement except total trading services revenues.
On an operating basis, non-interest expenses were $1.99 billion, up 4.1% on a year-over-year basis. All expense components, except other costs, increased during the quarter.
As of Sep 30, 2017, total assets under custody and administration were $32.1 trillion, up 10% year over year. Moreover, AUM was $2.7 trillion, up 9.3% year over year.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.6% as of Sep 30, 2017, up from 12% as of Jun 30, 2017.
Return on common equity (on an operating basis) came in at 13.4% compared with 11.1% in the year-ago quarter.
State Street Beacon
Given the continued challenging environment, State Street is accelerating its multi-year plan to further digitize its operating environment and create cost efficiencies. The company announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings by the end of 2020.
Moreover, State Street generated $175 million in annual pre-tax expense savings in 2016. The company remains on track to achieve at least $140 million in annual pre-tax net run rate expense savings in 2017.
Further, State Street Beacon will improve operating basis pre-tax profit margin to nearly 31% by 2018 and 33% by the end of 2020.
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of roughly $300–$400 million over the 5-year period ending Dec 31, 2020.
Fourth-Quarter 2017 Outlook
Management anticipates NIM expansion of a few basis points driven by asset repricing and continued liability management. NII is expected to be relatively stable from the prior quarter on the assumption of a slightly smaller balance sheet.
On sequential basis, management expects servicing fees to rise, while trading revenues are expected to be muted due to less market volatility.
Operating expenses are projected to increase marginally from the third quarter level, largely owing to costs associated with new business activity. Expenses will also be dependent on the revenue backdrop in the quarter and the onboarding of new clients.
The company expects effective tax rate to increase relative to third quarter level.
2017 Guidance
Management anticipates NII to be in the $2.43-$2.45 billion range. This takes into consideration interest rate expectations across the curve and currencies, which include a rate hike later this year. Apart from this, NII growth will depend on the size of balance sheet, client deposit behavior, balance sheet management activity and the impact of FX swap costs.
Fee revenues (on an operating basis) are projected to grow above the 6-7% range. This is based on the assumptions of the market conditions as of Oct 2017, the U.S. dollar remaining stable relative to major currencies and benefits from GE Asset Management deal.
In addition, the company targets generating positive fee-based operating leverage at the upper end of 100-200 basis points range (excluding $249 million acceleration of compensation expense incurred in fourth-quarter of 2016). Management expects to see variability across quarters, with continued focus on expense management. This, however, is likely to be partially offset by continued regulatory pressure, expenses related to supporting new business wins, investments in strategic initiatives and the contributions of the GE Asset Management deal.
On the cost front, management anticipates State Street Beacon expense savings to partly offset expenses to support new business, continued business investments, and merit and depreciation increases.
Management expects balance sheet to modestly decline, owing to lower client deposits and lower wholesale CD levels along with decrease in the average earning assets of roughly 0% to 5%.
In addition, operating-basis effective tax rate is estimated to be towards the lower end of the 30-32% range.
Long Term Guidance
Management targets revenue growth in the range of 8–12% along with the EPS growth of around 10–15%. Further, return on equity is expected to be in the range of 12–15%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.
At this time, State Street's stock has a poor Growth Score of F, however its Momentum is doing a lot better with a C. The stock was allocated a grade of F on the value side, putting it in the bottom quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum investors based on our style scores.
Outlook
Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.
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Why Is State Street (STT) Down 3.6% Since the Last Earnings Report?
It has been about a month since the last earnings report for State Street Corporation (STT - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
State Street Q3 Earnings Beat, Revenues Improve Y/Y
Rise in interest income drove State Street’s third-quarter 2017 operating earnings of $1.71 per share, which handily outpaced the Zacks Consensus Estimate of $1.61. Also, the figure was up 26.7% year over year.
Higher net interest income (reflecting rise in interest rates) and fee income supported the results. Also, assets under custody and administration and assets under management (AUM) witnessed growth. However, an increase in operating expenses and lower trading servicing fees were the undermining factors.
After considering certain non-recurring items, net income available to common shareholders came in at $629 million or $1.66 per share compared with $507 million or $1.29 per share in the year-ago quarter.
Revenues Improve, Expenses Rise
Revenues, on a GAAP basis totaled $2.85 billion, increasing 8.6% from the prior-year quarter. However, the top line lagged the Zacks Consensus Estimate of $2.95 billion.
Net interest revenues, on an operating basis, jumped 20.1% from the year-ago quarter to $645 million. The rise was mainly driven by higher interest rates, lower wholesale CD balances and disciplined liability pricing. Also, net interest margin increased 29 basis points year over year to 1.35%.
Fee revenues grew 4.9% from the prior-year quarter to $2.32 billion. All components of fee income showed improvement except total trading services revenues.
On an operating basis, non-interest expenses were $1.99 billion, up 4.1% on a year-over-year basis. All expense components, except other costs, increased during the quarter.
As of Sep 30, 2017, total assets under custody and administration were $32.1 trillion, up 10% year over year. Moreover, AUM was $2.7 trillion, up 9.3% year over year.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.6% as of Sep 30, 2017, up from 12% as of Jun 30, 2017.
Return on common equity (on an operating basis) came in at 13.4% compared with 11.1% in the year-ago quarter.
State Street Beacon
Given the continued challenging environment, State Street is accelerating its multi-year plan to further digitize its operating environment and create cost efficiencies. The company announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings by the end of 2020.
Moreover, State Street generated $175 million in annual pre-tax expense savings in 2016. The company remains on track to achieve at least $140 million in annual pre-tax net run rate expense savings in 2017.
Further, State Street Beacon will improve operating basis pre-tax profit margin to nearly 31% by 2018 and 33% by the end of 2020.
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of roughly $300–$400 million over the 5-year period ending Dec 31, 2020.
Fourth-Quarter 2017 Outlook
Management anticipates NIM expansion of a few basis points driven by asset repricing and continued liability management. NII is expected to be relatively stable from the prior quarter on the assumption of a slightly smaller balance sheet.
On sequential basis, management expects servicing fees to rise, while trading revenues are expected to be muted due to less market volatility.
Operating expenses are projected to increase marginally from the third quarter level, largely owing to costs associated with new business activity. Expenses will also be dependent on the revenue backdrop in the quarter and the onboarding of new clients.
The company expects effective tax rate to increase relative to third quarter level.
2017 Guidance
Management anticipates NII to be in the $2.43-$2.45 billion range. This takes into consideration interest rate expectations across the curve and currencies, which include a rate hike later this year. Apart from this, NII growth will depend on the size of balance sheet, client deposit behavior, balance sheet management activity and the impact of FX swap costs.
Fee revenues (on an operating basis) are projected to grow above the 6-7% range. This is based on the assumptions of the market conditions as of Oct 2017, the U.S. dollar remaining stable relative to major currencies and benefits from GE Asset Management deal.
In addition, the company targets generating positive fee-based operating leverage at the upper end of 100-200 basis points range (excluding $249 million acceleration of compensation expense incurred in fourth-quarter of 2016). Management expects to see variability across quarters, with continued focus on expense management. This, however, is likely to be partially offset by continued regulatory pressure, expenses related to supporting new business wins, investments in strategic initiatives and the contributions of the GE Asset Management deal.
On the cost front, management anticipates State Street Beacon expense savings to partly offset expenses to support new business, continued business investments, and merit and depreciation increases.
Management expects balance sheet to modestly decline, owing to lower client deposits and lower wholesale CD levels along with decrease in the average earning assets of roughly 0% to 5%.
In addition, operating-basis effective tax rate is estimated to be towards the lower end of the 30-32% range.
Long Term Guidance
Management targets revenue growth in the range of 8–12% along with the EPS growth of around 10–15%. Further, return on equity is expected to be in the range of 12–15%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.
State Street Corporation Price and Consensus
State Street Corporation Price and Consensus | State Street Corporation Quote
VGM Scores
At this time, State Street's stock has a poor Growth Score of F, however its Momentum is doing a lot better with a C. The stock was allocated a grade of F on the value side, putting it in the bottom quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum investors based on our style scores.
Outlook
Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.