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State Street (STT) Down 2.8% Since Earnings Report: Can It Rebound?
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It has been about a month since the last earnings report for State Street Corporation (STT - Free Report) . Shares have lost about 2.8% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is STT 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 Beats on Q1 Earnings as Revenues Improve
State Street’s first-quarter 2018 earnings of $1.62 per share handily outpaced the Zacks Consensus Estimate of $1.58. Also, it was 40.9% above the prior-year quarter.
Higher net interest income (reflecting rise in interest rates) and fee income (indicating higher trading services income) 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.
Net income available to common shareholders came in at $605 million, up 35.7% from the year-ago quarter.
Revenues Improve, Expenses Rise
Total revenues were $3.02 billion, increasing 13.2% from the prior-year quarter. Further, the top line matched the Zacks Consensus Estimate.
Net interest revenues jumped 29% from the year-ago quarter to $658 million. The rise was mainly driven by higher interest rates, loan growth and increase in client balances. Also, net interest margin increased 26 basis points year over year to 1.43%.
Fee revenues grew 7.5% from the prior-year quarter to $2.37 billion. All components of fee income showed improvement except processing fees and other revenues.
During the reported quarter, new asset servicing mandates totaled $1.3 trillion.
Non-interest expenses were $2.26 billion, up 8.1% on a year-over-year basis. The rise was due to increase in other expense components.
As of Mar 31, 2018, total assets under custody and administration were $33.3 trillion, up 11.6% year over year. Moreover, AUM was $2.7 trillion, up 6.6%.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.1% as of Mar 31, 2018, up from 12.0% as of Dec 31, 2017.
Return on common equity came in at 12.8% compared with 9.9% in the year-ago quarter.
Share Repurchase Update
During the reported quarter, State Street repurchased shares worth $350 million. This was part of the company’s 2017 capital plan.
State Street Beacon
Given the continued challenging environment, State Street is accelerating its multi-year plan to further digitize its operating environment and create cost efficiencies. The company announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings (from the prior target date of 2020-end) and improve operating basis pre-tax profit margin to 33% by 2020.
Moreover, State Street generated $58 million, $150 million and $175 million in pre-tax expense savings in first quarter 2018, 2017 and 2016, respectively. The company now targets to achieve $150 million in annual pre-tax net run rate expense savings in 2018. Also, the company reached its operating basis pre-tax profit margin target of 31% in 2017 (ahead of scheduled 2018-end).
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of approximately $300–$400 million.
Outlook
2018
State Street will be providing financials primarily on GAAP basis this year, while presenting certain non-GAAP measures such as pre-tax margin as well as additional notable items including acquisition restructuring costs in line with industry practice.
Starting 2018 on a perspective basis, the new FASI revenue recognition standard takes effect, under which certain costs previously presented on a net basis will now be represented on a gross basis. Hence, management expects revenues and expenses to increase nearly $225 million.
Considering the gains on sale, management expects fee revenues to rise in the range of 7-8%, attributable to decent equity market growth and continued low volatility trading divisions.
The company anticipates swap cost to moderate as following the changes in the currency mix of balance sheet. Therefore, processing fees and other revenue will be in the range of $35-45 million on a quarterly basis.
Further, the company projects positive fee operating leverage in the 75 to 150 basis points range and reflects focus on both investments and expense management. Management expects to see variability across quarters, with continued focus on expense management.
NII is anticipated to grow within a range of 10% to 13%, reflecting higher expected interest rates. Further, balance sheet growth will mainly depend on new business and related client deposit activity.
In addition, on a GAAP basis effective tax rate is estimated to be in the 15-17% range.
Second-Quarter 2018
The company expects momentum in NII growth to continue, driven by higher rates.
Management expects securities finance, which includes the agency and enhanced custody businesses, to witness seasonal uptick sequentially, albeit at muted levels compared with the year-ago quarter.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. There have been three revisions higher for the current quarter compared to four lower.
At this time, STT has a nice Growth Score of B, a grade with the same score on the momentum front. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for growth and momentum investors than value investors.
Outlook
Estimates have been trending downward for the stock and the magnitude of these revisions looks promising. Interestingly, STT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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State Street (STT) Down 2.8% Since Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for State Street Corporation (STT - Free Report) . Shares have lost about 2.8% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is STT 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 Beats on Q1 Earnings as Revenues Improve
State Street’s first-quarter 2018 earnings of $1.62 per share handily outpaced the Zacks Consensus Estimate of $1.58. Also, it was 40.9% above the prior-year quarter.
Higher net interest income (reflecting rise in interest rates) and fee income (indicating higher trading services income) 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.
Net income available to common shareholders came in at $605 million, up 35.7% from the year-ago quarter.
Revenues Improve, Expenses Rise
Total revenues were $3.02 billion, increasing 13.2% from the prior-year quarter. Further, the top line matched the Zacks Consensus Estimate.
Net interest revenues jumped 29% from the year-ago quarter to $658 million. The rise was mainly driven by higher interest rates, loan growth and increase in client balances. Also, net interest margin increased 26 basis points year over year to 1.43%.
Fee revenues grew 7.5% from the prior-year quarter to $2.37 billion. All components of fee income showed improvement except processing fees and other revenues.
During the reported quarter, new asset servicing mandates totaled $1.3 trillion.
Non-interest expenses were $2.26 billion, up 8.1% on a year-over-year basis. The rise was due to increase in other expense components.
As of Mar 31, 2018, total assets under custody and administration were $33.3 trillion, up 11.6% year over year. Moreover, AUM was $2.7 trillion, up 6.6%.
Strong Capital and Profitability Ratios
Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.1% as of Mar 31, 2018, up from 12.0% as of Dec 31, 2017.
Return on common equity came in at 12.8% compared with 9.9% in the year-ago quarter.
Share Repurchase Update
During the reported quarter, State Street repurchased shares worth $350 million. This was part of the company’s 2017 capital plan.
State Street Beacon
Given the continued challenging environment, State Street is accelerating its multi-year plan to further digitize its operating environment and create cost efficiencies. The company announced a multi-year plan to accelerate the next phase of its transformation program aimed at generating roughly $550 million in annualized pre-tax savings (from the prior target date of 2020-end) and improve operating basis pre-tax profit margin to 33% by 2020.
Moreover, State Street generated $58 million, $150 million and $175 million in pre-tax expense savings in first quarter 2018, 2017 and 2016, respectively. The company now targets to achieve $150 million in annual pre-tax net run rate expense savings in 2018. Also, the company reached its operating basis pre-tax profit margin target of 31% in 2017 (ahead of scheduled 2018-end).
In order to implement State Street Beacon, the company anticipates incurring aggregate pre-tax restructuring costs of approximately $300–$400 million.
Outlook
2018
State Street will be providing financials primarily on GAAP basis this year, while presenting certain non-GAAP measures such as pre-tax margin as well as additional notable items including acquisition restructuring costs in line with industry practice.
Starting 2018 on a perspective basis, the new FASI revenue recognition standard takes effect, under which certain costs previously presented on a net basis will now be represented on a gross basis. Hence, management expects revenues and expenses to increase nearly $225 million.
Considering the gains on sale, management expects fee revenues to rise in the range of 7-8%, attributable to decent equity market growth and continued low volatility trading divisions.
The company anticipates swap cost to moderate as following the changes in the currency mix of balance sheet. Therefore, processing fees and other revenue will be in the range of $35-45 million on a quarterly basis.
Further, the company projects positive fee operating leverage in the 75 to 150 basis points range and reflects focus on both investments and expense management. Management expects to see variability across quarters, with continued focus on expense management.
NII is anticipated to grow within a range of 10% to 13%, reflecting higher expected interest rates. Further, balance sheet growth will mainly depend on new business and related client deposit activity.
In addition, on a GAAP basis effective tax rate is estimated to be in the 15-17% range.
Second-Quarter 2018
The company expects momentum in NII growth to continue, driven by higher rates.
Management expects securities finance, which includes the agency and enhanced custody businesses, to witness seasonal uptick sequentially, albeit at muted levels compared with the year-ago quarter.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. There have been three revisions higher for the current quarter compared to four lower.
State Street Corporation Price and Consensus
State Street Corporation Price and Consensus | State Street Corporation Quote
VGM Scores
At this time, STT has a nice Growth Score of B, a grade with the same score on the momentum front. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for growth and momentum investors than value investors.
Outlook
Estimates have been trending downward for the stock and the magnitude of these revisions looks promising. Interestingly, STT has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.