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On Mar 28, 2013, we reiterated our long-term recommendation on State Street Corporation (STT - Analyst Report) at Neutral. Our decision rests on augmented top line and solid capital position. However, we remain concerned about its mounting expenses.

Why Neutral?

State Street’s fourth-quarter 2012 earnings came in at $1.11 per share, substantially beating the Zacks Consensus Estimate of $1.00. Earnings were primarily driven by an improved top line and a robust capital position.

Following its fourth-quarter results, the Zacks Consensus Estimate for 2013 went up by 1.38% to $4.29 per share over the last 60 days. The Zacks Consensus Estimate for 2014 also inched up 1.83% to $5.00 per share over the same time frame. Hence, State Street currently holds a Zacks Rank #2 (Buy).

With the approval of State Street’s Capital Plan by the Federal Reserve, the company authorized a new share repurchase program, under which it plans to buy back shares worth up to $2.1 billion through Mar 13, 2014. Further, it received approval from the Fed to hike its quarterly dividend by 8.3% to 26 cents per share.

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

However, 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 and low-interest rate environment can act as dampeners going forward.

Other Major Banks to Consider

Though we prefer State Street, other major banks that are performing well includes Citigroup, Inc. (C - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report) and Northern Trust Corporation (NTRS - Analyst Report). All these also carry a Zacks Rank #2 (Buy).

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