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Why Is State Street (STT) Down 7.8% Since its 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 7.8% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is STT due for a breakout? Before we dive into how investors and analysts have reacted as 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 Q4 Earnings Improves as Revenues Rise, Costs Up
State Street’s fourth-quarter 2017 operating earnings of $1.83 per share increased 23.6% year over year. The figure excluded one-time net costs of $270 million or 72 cents per share related to the tax reform and other significant non-recurring items.
Moreover, GAAP earnings excluding one-time tax charges were $1.61 per share, up 23.8% from the prior-year quarter. The Zacks Consensus Estimate was $1.71.
Higher net interest income (reflecting rise in interest rates), fee income and a decline in operating expenses supported the results. Also, improvement in assets under custody and administration and assets under management (AUM) acted as a tailwind. However, lower trading servicing fees was an undermining factor.
After considering several notable items, net income available to common shareholders came in at $334 million or 89 cents per share compared with $557 million or $1.43 per share in the year-ago quarter.
Revenues Improve, Expenses Rise
Revenues, on a GAAP basis totaled $2.85 billion, increasing 12.5% from the prior-year quarter. However, the top line lagged the Zacks Consensus Estimate of $2.98 billion.
Net interest revenues, on an operating basis, jumped 20.3% from the year-ago quarter to $658 million. The rise was mainly driven by higher interest rates, loan growth and disciplined liability pricing. Also, net interest margin increased 31 basis points year over year to 1.38%.
Fee revenues grew 5.7% from the prior-year quarter to $2.33 billion. All components of fee income showed improvement except total trading services revenues.
On an operating basis, non-interest expenses were $2 billion, down 6.8% on a year-over-year basis. The fall was due to lower other costs and compensation and employee benefits expenses.
As of Dec 31, 2017, total assets under custody and administration were $33.1 trillion, up 15.1% year over year. Moreover, AUM was $2.8 trillion, up 12.7% year over year.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.3% as of Dec 31, 2017, down from 12.6% as of Sep 30, 2017.
Return on common equity (on an operating basis) came in at 14.1% compared with 12.5% 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 (from the prior target date of 2020-end) and improve operating basis pre-tax profit margin to 33% by 2020.
Moreover, State Street generated $175 million and $150 million in annual pre-tax expense savings in 2016 and 2017, respectively. The company now targets to achieve $150 million in annual pre-tax net run rate expense savings in 2018. Also, the company reached its operating basis pre-tax profit margin target of 31% in 2017 (ahead of scheduled 2018-end).
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of approximately $300–$400 million.
Outlook
2018
State Street will be providing financials primarily on GAAP basis this year, while presenting certain non-GAAP measures such as pre-tax margin as well as additional notable items including acquisition restructuring costs in line with industry practice.
Starting 2018 on a perspective basis, the new FASI revenue recognition standard takes effect, under which certain costs previously presented on a net basis will now be represented on a gross basis. Hence, management expects revenues and expenses to increase nearly $225 million.
Considering the gains on sale, management expects fee revenues to rise in the range of 7-8%, attributable to decent equity market growth and continued low volatility trading divisions.
Further, the company projects positive fee operating leverage in the 75 to 150 basis points range and reflects focus on both investments and expense management. Management expects to see variability across quarters, with continued focus on expense management.
NII is anticipated to grow within a range of 10% to 13%, reflecting higher expected interest rates. Further, balance sheet growth will mainly depend on new business and related client deposit activity.
In addition, on a GAAP basis effective tax rate is estimated to be in the 15-17% range.
First-Quarter 2018
Management expects first quarter 2018 guidance to be relatively in line with full year outlook.
Notably, compensation benefit expense will be seasonally higher in the quarter due to the effect of the accounting treatment of equity compensation from retirement eligible employees as well as payroll taxes.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to three lower.
At this time, STT has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was also allocated a grade of F on the value side, putting it in the fifth 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 based on our styles scores.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, STT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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Why Is State Street (STT) Down 7.8% Since its 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 7.8% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is STT due for a breakout? Before we dive into how investors and analysts have reacted as 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 Q4 Earnings Improves as Revenues Rise, Costs Up
State Street’s fourth-quarter 2017 operating earnings of $1.83 per share increased 23.6% year over year. The figure excluded one-time net costs of $270 million or 72 cents per share related to the tax reform and other significant non-recurring items.
Moreover, GAAP earnings excluding one-time tax charges were $1.61 per share, up 23.8% from the prior-year quarter. The Zacks Consensus Estimate was $1.71.
Higher net interest income (reflecting rise in interest rates), fee income and a decline in operating expenses supported the results. Also, improvement in assets under custody and administration and assets under management (AUM) acted as a tailwind. However, lower trading servicing fees was an undermining factor.
After considering several notable items, net income available to common shareholders came in at $334 million or 89 cents per share compared with $557 million or $1.43 per share in the year-ago quarter.
Revenues Improve, Expenses Rise
Revenues, on a GAAP basis totaled $2.85 billion, increasing 12.5% from the prior-year quarter. However, the top line lagged the Zacks Consensus Estimate of $2.98 billion.
Net interest revenues, on an operating basis, jumped 20.3% from the year-ago quarter to $658 million. The rise was mainly driven by higher interest rates, loan growth and disciplined liability pricing. Also, net interest margin increased 31 basis points year over year to 1.38%.
Fee revenues grew 5.7% from the prior-year quarter to $2.33 billion. All components of fee income showed improvement except total trading services revenues.
On an operating basis, non-interest expenses were $2 billion, down 6.8% on a year-over-year basis. The fall was due to lower other costs and compensation and employee benefits expenses.
As of Dec 31, 2017, total assets under custody and administration were $33.1 trillion, up 15.1% year over year. Moreover, AUM was $2.8 trillion, up 12.7% year over year.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.3% as of Dec 31, 2017, down from 12.6% as of Sep 30, 2017.
Return on common equity (on an operating basis) came in at 14.1% compared with 12.5% 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 (from the prior target date of 2020-end) and improve operating basis pre-tax profit margin to 33% by 2020.
Moreover, State Street generated $175 million and $150 million in annual pre-tax expense savings in 2016 and 2017, respectively. The company now targets to achieve $150 million in annual pre-tax net run rate expense savings in 2018. Also, the company reached its operating basis pre-tax profit margin target of 31% in 2017 (ahead of scheduled 2018-end).
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of approximately $300–$400 million.
Outlook
2018
State Street will be providing financials primarily on GAAP basis this year, while presenting certain non-GAAP measures such as pre-tax margin as well as additional notable items including acquisition restructuring costs in line with industry practice.
Starting 2018 on a perspective basis, the new FASI revenue recognition standard takes effect, under which certain costs previously presented on a net basis will now be represented on a gross basis. Hence, management expects revenues and expenses to increase nearly $225 million.
Considering the gains on sale, management expects fee revenues to rise in the range of 7-8%, attributable to decent equity market growth and continued low volatility trading divisions.
Further, the company projects positive fee operating leverage in the 75 to 150 basis points range and reflects focus on both investments and expense management. Management expects to see variability across quarters, with continued focus on expense management.
NII is anticipated to grow within a range of 10% to 13%, reflecting higher expected interest rates. Further, balance sheet growth will mainly depend on new business and related client deposit activity.
In addition, on a GAAP basis effective tax rate is estimated to be in the 15-17% range.
First-Quarter 2018
Management expects first quarter 2018 guidance to be relatively in line with full year outlook.
Notably, compensation benefit expense will be seasonally higher in the quarter due to the effect of the accounting treatment of equity compensation from retirement eligible employees as well as payroll taxes.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to three lower.
State Street Corporation Price and Consensus
State Street Corporation Price and Consensus | State Street Corporation Quote
VGM Scores
At this time, STT has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was also allocated a grade of F on the value side, putting it in the fifth 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 based on our styles scores.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, STT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.