A month has gone by since the last earnings report for State Street (STT - Free Report) . Shares have lost about 0.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is State Street due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
State Street’s Q4 Earnings Beat on Higher Revenues
State Street’s adjusted fourth-quarter 2018 earnings of $1.68 per share beat the Zacks Consensus Estimate by a penny. However, the figure was 10.2% below the prior-year quarter level.
Results reflected higher net interest income (reflecting rise in interest rates) and fee income, which supported revenue growth. However, increase in non-interest expenses and assets under custody and administration plus assets under management (AUM) decline were the undermining factors.
After considering several non-recurring items, net income available to common shareholders was $398 million or $1.04 per share, up from $343 million or 89 cents per share in the year-ago quarter.
Adjusted earnings of $7.22 per share for 2018 increased 15.3% year over year. The figure lagged the Zacks Consensus Estimate by a penny. Net income available to common shareholders (GAAP basis) was $2.41 billion, up 20.9% from the prior year.
Revenues Improve, Expenses Rise
Total revenues were $2.99 billion, increasing 4.9% year over year. Also, the top line marginally beat the Zacks Consensus Estimate of $2.98 billion.
For 2018, total revenues were $11.98 billion, increasing 7.2% from the 2017 level. The top line matched the consensus estimate.
Net interest revenues increased 13.1% from the year-ago quarter to $697 million. This upside was mainly driven by higher interest rates and disciplined liability pricing. Also, net interest margin expanded 17 basis points year over year to 1.55%.
Fee revenues grew 2.6% from the prior-year quarter to $2.29 billion. This uptick was aided by higher management fees, processing fees, and other revenue and foreign exchange trading services, partially offset by a decline in servicing fees and securities finance revenues.
Non-interest expenses were $2.47 billion, up 16.1% on a year-over-year basis. The rise was due to increase in all expense components except for transaction processing service expenses, and acquisition and restructuring costs.
As of Dec 31, 2018, total assets under custody and administration were $31.6 trillion, down 4.5% year over year. Moreover, AUM was $2.5 trillion, down 9.7%.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.1% as of Dec 31, 2018, compared with 14.1% as of Sep 30, 2018.
Return on common equity was 7.5% compared with 6.9% in the year-ago quarter.
Net interest revenues are anticipated to grow in the low to mid-single-digit range in 2019.
Management expects to expenses to decline nearly 2% in first-quarter 2019 on a sequential basis.
Fee revenues in first-quarter 2019 are expected to be down 3-4% sequentially.
In addition, tax rate is estimated to be 15-16% in 2019. However, in the first quarter, tax rate is expected to be a little higher at nearly 18%.
Including the impact of the Charles River Development buyout, the company expects revenues to grow 4-5%.
Pre-tax margin is expected to improve 2%.
Management expects EPS growth of 10-15% and ROE of 12-15%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.23% due to these changes.
Currently, State Street has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise State Street has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.