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What's in the Cards for State Street (STT) in Q3 Earnings?

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State Street (STT - Free Report) is slated to announce third-quarter 2021 results on Oct 18, before market open. The company’s revenues and earnings are expected to have increased on a year-over-year basis.

In the last-reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results gained from provision benefits and rise in fee income, partly offset by a fall in net interest revenues (“NIR”) and higher expenses.

State Street has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the surprise being 7.53%, on average.

State Street Corporation Price and EPS Surprise

State Street Corporation Price and EPS Surprise

State Street Corporation price-eps-surprise | State Street Corporation Quote

The Zacks Consensus Estimate of $1.92 for State Street’s earnings for the to-be-reported quarter has moved 1% lower over the past 30 days. The figure, however, indicates growth of 32.4% from the year-ago reported number. The consensus estimate for revenues is pegged at $2.95 billion, indicating a 6% rise.

Major Factors at Play

Net Interest Revenues: The Zacks Consensus Estimate for average interest-earning assets is pegged at $265 billion for the to-be-reported quarter, which suggests a marginal fall from the quarter-ago reported number.

Economic growth gained traction, demand for loans improved modestly and yield on bonds steepened during the third quarter. Thus, State Street’s interest income might have received some support from this avenue during the quarter. Yet, the low interest rate environment continued to be a concern and is expected to have adversely impacted the company’s net interest margin in the to-be-reported quarter.

Management estimates NIR to be in the range of $460-$470 million in the quarter, assuming rates do not deteriorate and premium amortization continues to fall. The consensus estimate for NIR (on a fully taxable-equivalent basis), $469 million, indicates a slight sequential decline.

Fee Revenues: During the third quarter, foreign exchange (FX) trading volatility and volumes were down. The consensus estimate for foreign exchange trading services indicates a quarter-over-quarter fall of 8% to $263 million.

Given the widening spread between the three-month LIBOR and the Fed funds rate, securities finance revenues are likely to have been adversely impacted during the quarter. The Zacks Consensus Estimate for the same, $101 million, suggests a 7.3% decline from the previous quarter.

Driven by decent client activities, strength in equity markets is likely to have boosted the company’s servicing and management fees in the to-be-reported quarter. The consensus estimate for servicing fees of $1.42 billion indicates a 1.3% sequential rise, while the consensus estimate for management fees of $520 million implies 3.2% growth.

Overall, for the September quarter, the Zacks Consensus Estimate for total fee revenues of $2.48 billion indicates a 1.4% fall from the prior quarter.

Management anticipates overall fee revenues to be up 7% to 8% year over year in the third quarter, with servicing and management fees each expected to be up 7-9%. Given the current improvement in short-end rates, the company expects money market fee waivers on management fees to be nearly $20-$25 million.

Expenses: Due to higher information systems and communication expenses, as well as acquisition and restructuring costs, the company has been witnessing a steady rise in expenses over the past few quarters. The same trend is likely to have persisted this time as well.

Management expects third-quarter expenses to be relatively stable year over year.

Major Deals During the Third Quarter

In September, State Street acquired Mercatus Inc., in an effort to offer a fully integrated platform for growing private market segments like infrastructure, private equity, real estate, private debt and fund of funds. Financial terms of the deal, announced in July, have not been disclosed.

In the same month, the company inked a $3.5-billion cash transaction to buy Brown Brothers Harriman & Co.’s Investor Services business. The deal will ramp up and expand State Street’s core custodian business of servicing investment firms further across the globe. Upon the deal’s closure, the company will become the leading asset servicer globally. The transaction will be accretive to the company’s revenues and earnings, and also lead to substantial cost savings.

What the Zacks Model Reveals

Our proven model does not conclusively predict an earnings beat for State Street this time around. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for State Street is +0.00%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Banks Worth a Look

Here are some bank stocks that you may want to consider as these have the right combination of elements to post earnings beats in their upcoming releases, per our model.

Zions Bancorporation (ZION - Free Report) is slated to report quarterly results on Oct 18. The company has an Earnings ESP of +2.49% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fifth Third Bancorp (FITB - Free Report) is slated to report quarterly earnings on Oct 19. The company, which carries a Zacks Rank of 2 (Buy) at present, has an Earnings ESP of +0.46%.

The Earnings ESP for KeyCorp (KEY - Free Report) is +0.56%. This Zacks #3 Ranked company is scheduled to report quarterly numbers on Oct 21.

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