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State Street (STT) Beats on Q2 Earnings, to Acquire CRD

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State Street’s (STT - Free Report) second-quarter 2018 adjusted earnings of $2.05 per share outpaced the Zacks Consensus Estimate of $2.01. Results excluded $77 million or 17 cents per share of repositioning charge related to organizational realignment.

State Street’s shares lost more than 5% in pre-market trading. Suspension of share buybacks till the end of this year due to the announcement of deal to acquire Charles River Development (“CRD”) is perhaps the primary reason. The price reaction during the full trading session will provide a better idea.

Results reflected higher net interest income (reflecting rise in interest rates) and fee income (indicating higher trading services income and management fees), which supported top-line growth. Also, improvement in assets under custody and administration and assets under management (AUM) acted as a tailwind. However, increase in non-interest expenses was an undermining factor.

Including the above-mentioned charges, net income available to common shareholders was $698 million or $1.88 per share, up from $584 million or $1.53 per share in the year-ago quarter.

Revenues Improve, Expenses Rise

Total revenues were $3.03 billion, increasing 7.7% from the prior-year quarter. However, the top line lagged the Zacks Consensus Estimate of $3.07 billion.

Net interest revenues increased 14.6% from the year-ago quarter to $659 million. The rise was mainly driven by higher interest rates and disciplined liability pricing. Also, net interest margin increased 19 basis points year over year to 1.46%.

Fee revenues grew 5.5% from the prior-year quarter to $2.36 billion. All components of fee income showed improvement except securities finance revenues.

Non-interest expenses were $2.16 billion, up 6.3% on a year-over-year basis. The rise was due to increase in other expense components.

State Street achieved $120 million of cost savings under Beacon in the first half of 2018. The company now expects $200 million in savings in 2018, up from the prior target of $150 million.

As of Jun 30, 2018, total assets under custody and administration were $33.9 trillion, up 9.1% year over year. Moreover, AUM was $2.7 trillion, up 4.5%.

Strong Capital and Profitability Ratios

Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.4% as of Jun 30, 2018, up from 12.1% as of Mar 31, 2018.

Return on common equity came in at 14.7% compared with 12.6% in the year-ago quarter.

Acquisition of Charles River Development

State Street announced a deal to acquire Burlington, MS-based CRD for $2.6 billion in cash. The deal, expected to close in the fourth quarter 2018, is subject to regulatory approvals and customary closing conditions.

State Street anticipates the deal to result in revenue and expense synergies. Also, it will be accretive to the company’s earnings in 2020.

Notably, to finance the deal, State Street suspended its $950 million worth of share repurchase in the second quarter and for remainder of the year. Additionally, the company plans issuance of equity (two-thirds in the form of common stock and one-third in preferred stock) for financing remainder of the deal.

Ron O’Hanley, president and chief operating officer of State Street said, “We are confident that this acquisition will enable us to deepen and grow our client base and deliver positive results for our shareholders.”

Our Viewpoint

State Street is well poised to benefit from higher interest rates and inorganic growth efforts. Also, the company remains on track to improve efficiency through its multi-year restructuring plan. However, mounting expenses are expected to continue hurting its bottom line in the upcoming quarters.

State Street Corporation Price, Consensus and EPS Surprise


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

State Street currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Regional Banks

KeyCorp’s (KEY - Free Report) second-quarter 2018 earnings of 44 cents per share surpassed the Zacks Consensus Estimate of 42 cents. Also, this compared favorably with earnings of 36 cents recorded in the prior-year quarter.

Comerica (CMA - Free Report) reported adjusted earnings per share of $1.90 in second-quarter 2018, up from the year-ago adjusted figure of $1.15. Including certain non-recurring items, earnings came in at $1.87. The Zacks Consensus Estimate was $1.62.

BB&T Corporation’s second-quarter 2018 adjusted earnings of $1.01 were in line with the Zacks Consensus Estimate. Moreover, the figure recorded 29.5% jump from the year-ago quarter.

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