A month has gone by since the last earnings report for State Street Corporation (STT Quick QuoteSTT - Free Report) . Shares have added about 1.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is State Street Corporation due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

State Street's Q3 Earnings & Revenue Beat Estimates, Costs Up Modestly

State Street’s third-quarter 2021 adjusted earnings of $2.00 per share outpaced the Zacks Consensus Estimate of $1.92. Also, the bottom line was 37.9% higher than the prior-year level.

Results reflected new investment servicing wins, provision benefits, and improvement in revenues. However, a marginal rise in expenses and lower interest rates were the headwinds.
 
Results excluded non-recurring items. After considering those, net income available to common shareholders was $693 million or $1.96 per share, up from $517 million or $1.45 per share in the year-ago quarter.

Revenues Improve, Expenses Rise Marginally

Total revenues were $2.99 billion, increasing 7.4% year over year. Also, the top line beat the Zacks Consensus Estimate of $2.95 billion.

Net interest income was $487 million, up 1.9% year over year. The growth was mainly driven by higher loan balance and a rise in deposits and investment portfolio balance, which was partially offset by lower investment portfolio yields.

Net interest margin contracted 9 basis points to 0.76%.

Total fee revenues grew 8.6% year over year to $2.50 billion. The rise was mainly driven by improvement in all fee components.

Non-interest expenses were $2.11 billion, increasing marginally from the prior-year quarter. Excluding notable items, adjusted expenses were relatively stable at $2.10 billion.

Provision for credit losses was a benefit of $2 million in the reported quarter against no provisions in the prior-year quarter.

Asset Balances Improve

As of Sep 30, 2021, total assets under custody (AUC) and administration were $43.3 trillion, up 18.3% year over year.  The rise was mainly due to higher market levels, net new business growth, and client flows.

Assets under management were $3.9 trillion, up 22.7% year over year. The growth was driven largely by higher market levels and net inflows from exchange-traded funds and cash, partly offset by institutional net outflows.

Capital and Profitability Ratios Strong

Common equity Tier 1 ratio was 13.5% as of Sep 30, 2021, compared with 12.4% in the corresponding period of 2020.

Return on common equity was 11.6% compared with 8.9% in the year-ago quarter.

2021 Outlook

The company’s outlook is based on certain assumptions. Short-term interest rates are expected to align with the current forward rate curve. Also, global equity markets are projected to remain in line with the current levels and there is an expectation of continued normalization of FX market volatility.

NII is expected decline in the double-digit range.

Fee revenues growth is expected to be up 5%, with servicing fees expected to be up 7.5% to 8.5%. The meaningful improvement from the prior target is because of both higher equity markets and net new business performance.

Given the strong revenue performance this year and a healthy pipeline, management plans to both invest in staff and business as well as cover some revenue-related costs. Thus, excluding notable items, overall expenses are expected to be up 1-1.25%.

As the company integrates CRD into its business, it anticipates incurring roughly $225 million in aggregate of acquisition costs for the period beginning the last quarter of 2018 through 2021.

Management expects the current business servicing wins but yet to be installed assets will be converted over the coming 12 to 24-month time period with half of the associated revenue benefits occurring in 2022 and the other half in 2023.

Effective tax rate is expected to be 17-19%.

Fourth-Quarter 2021 Outlook

NII is expected to be in the range of $475-$490 million. This shows a marked improvement from earlier guidance of $460-$470 million and is driven by a small rebound in the short end-market rates and some movement in the longer end of the curve.

Expenses (excluding notable items) will likely be up sequentially.

Given the current improvement in short-end rates following the September FOMC meeting, the company now expects money market fee waivers on management fees to be nearly $20 million in the fourth quarter. Earlier the company had projected the same to be roughly $20-$25 million per quarter.

Medium-Term Targets (to be achieved by 2023-end)

Including the impact of the CRD buyout, the company expects revenue increase of 4-5%. Pre-tax margin is now expected to be 31%, improving from prior target of 30% and is driven by the deal to acquire BBH’s Investor Services business.

Management expects earnings per share growth of 10-15% and ROE of 12-15%. Total payout ratio is expected to be greater than or equal to 80%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, State Street Corporation has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, State Street Corporation has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.