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Can Higher Rates Aid State Street's (STT) Earnings in Q2?

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State Street (STT - Free Report) is scheduled to report second-quarter 2018 results on Jul 20, before the market opens. Its earnings and revenues are expected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results were aided by an increase in revenues, partly offset by higher expenses.

Moreover, State Street boasts an impressive earnings surprise history. The company’s earnings have surpassed the Zacks Consensus Estimate in all the trailing four quarters, with an average beat of 5.5%.

State Street Corporation Price and EPS Surprise

State Street Corporation Price and EPS Surprise | State Street Corporation Quote

However, activities of the company during the second quarter failed to win analysts’ confidence. Thus, the Zacks Consensus Estimate for earnings for the to-be-reported quarter moved marginally downward over the past 30 days to $2.01. Nonetheless, the figure represents a year-over-year increase of 20.4%.

The Zacks Consensus Estimate for sales is $3.07 billion for the second quarter, reflecting 9.3% year-over-year growth.

The company’s price performance does not seem impressive. Its shares have gained only 3.2% in the past year, underperforming 11.1% growth recorded by the industry.

Can the stock price performance improve post Q2 earnings? It depends on whether the company will be able to maintain its trend of beating earnings estimates.

Before we take a look at what our quantitative model predicts, let’s check the factors that are expected to impact Q2 results.

Factors at Play

Stable Net Interest Income (NII): The Zacks Consensus Estimate for average interest earning assets of $193.9 billion for the second quarter represents a decline of 13.4% year over year. Moreover, overall lending activities were also not very impressive during the quarter. Nevertheless, driven by modest loan growth, along with the benefits of higher interest rates (partly offset by the flattening of the yield curve), State Street’s NII is likely to either remain stable or witness a modest improvement.

Management expects momentum in NII growth to continue in the second quarter, driven by higher rates.

Muted Fee Revenue Growth: Despite State Street’s continued investments in new products and business wins, its servicing fees are not expected to witness an improvement during the second quarter because of weaker equity market performance.

Moreover, because of a sequential slowdown in volatility during the quarter, growth in trading revenues is also likely to remain muted. In fact, given the sequential decline in foreign exchange trading volumes, as well as decreased volatility during the second quarter, foreign exchange trading revenues are likely to decline.

Nevertheless, while equity trading volumes declined sequentially during the second quarter, which negatively impact the amount of securities on loans, the spread between the three-month LIBOR and the Fed funds rate improved. Thus, given the benefits of seasonality, along with wider spreads, securities lending revenues are expected to modestly improve during the to-be-reported quarter.

Notably, management expects securities finance revenues, which includes the agency and enhanced custody businesses, to witness a seasonal uptick, sequentially.

Stable Operating Expenses: State Street’s expenses have remained elevated over the past few years because of rise in compensation and employee benefit costs as well as acquisition and restructuring costs. Because of its continuing restructuring efforts, costs are likely to remain elevated. However, the State Street Beacon expense savings are likely to offset the rise to some extent during the second quarter.

Now, here is what our quantitative model predicts:

According to our quantitative model, chances of State Street beating the Zacks Consensus Estimate in the second quarter are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — for increasing 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.

Zacks ESP: The Earnings ESP for State Street is +0.28%.

Zacks Rank: State Street currently has a Zacks Rank #3, which increases the predictive power of ESP.

Other Stocks That Warrant a Look

Here are a few other finance stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat in the to-be-reported quarter.

KeyCorp (KEY - Free Report) is scheduled to release results on Jul 19. It has an Earnings ESP of +0.40% and currently carries a Zacks Rank #3.

E*TRADE Financial Corporation (ETFC - Free Report) has an Earnings ESP of +0.24% and presently carries a Zacks Rank of 3. The company is also slated to release results on Jul 19.

SunTrust Banks, Inc. is slated to release results on Jul 20. It has an Earnings ESP of +0.31% and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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