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State Street Corporation (STT) Up 4.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for State Street Corporation (STT). Shares have added about 4.4% 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 catalysts.

State Street Q3 Earnings Beat Estimates, Fee Income Improves

State Street’s third-quarter 2023 adjusted earnings of $1.93 per share surpassed the Zacks Consensus Estimate of $1.77. The bottom line was 6% higher than the prior-year quarter level.

Results have primarily been aided by an increase in fee revenues. Also, the company did not record any provisions in the quarter, which was a positive. However, lower NIR and higher expenses have hurt results to some extent.

In the reported quarter, the company recorded a loss on sale related to a previously disclosed investment portfolio repositioning, while in the year-ago quarter, it recorded acquisition and restructuring costs. Net income available to common shareholders (after considering the notable items) was $398 million, down from $669 million in the year-ago quarter. Our projection for the metric was $533.5 million.

Revenues Decline, Expenses Rise

Total revenues of $2.69 billion declined 9.1% year over year. Also, the top line missed the Zacks Consensus Estimate of $2.92 billion.

NIR was $624 million, down 5.5% year over year. The decline was due to lower average deposit balances and deposit mix shift, partially offset by the impacts of higher interest rates. The net interest margin rose 1 basis point year over year to 1.12%. Our estimates for NIR and NIM were $585.5 million and 1.05%, respectively.

Total fee revenues increased 2.7% year over year to $2.36 billion. The rise was driven by an increase in servicing fees, management fees, software and processing fees, and other fee revenues. We estimated the metric to be $2.39 billion.

Non-interest expenses were $2.18 billion, up 3.3% year over year. The rise was due to an increase in almost all cost components. Our estimate for the metric was $2.20 billion.

In the third quarter, the company did not record any provision for credit losses, just like the prior-year quarter. Our prediction for provision for credit losses was $12.8 million.

The common equity Tier 1 ratio was 11.0% as of Sep 30, 2023, compared with 13.2% in the corresponding period of 2022. The return on common equity was 7.3% compared with 11.2% in the year-ago quarter.

Asset Balances Increase

As of Sep 30, 2023, total assets under custody and administration were $40.02 trillion, up 12.1% year over year. The rise was driven by higher quarter-end equity market levels and net new business. We had projected the metric to be $39.3 trillion.

Assets under management were $3.69 trillion, up 12.9% year over year, primarily driven by higher quarter-end market levels. Our estimate for the metric was $3.7 trillion.

Share Repurchase Update

In the reported quarter, State Street repurchased shares worth $1 billion.

Fourth-Quarter 2023 Outlook

At the macro level, the company’s interest rate outlook is largely in line with the current forwards. Also, it assumes the global equity markets and bond markets to be down quarter over quarter.

NIR is expected to be in the middle of the $550-$600 million range. This includes expected non-interest-bearing deposit rotation (expected to be $3-4 billion) and the impact of deposit repricing, which will likely be partially offset by stability in the total average deposit balance.

Fee revenues are expected to be flat to up 1% year over year. Both servicing fees and management fees are expected to be stable with last year's quarter. Driven by the timing of on-premise renewals and expected new SaaS installations, software and processing fees are likely to go up in the range of 10-12%. Other fee revenues are anticipated to be in the range of $30-$40 million. Also, FX markets revenues are anticipated to be down modestly from the last-year quarter level.

Management expects adjusted expenses to be relatively stable on a sequential basis. This excludes potentially higher FDIC assessment fees.

Adjusted effective tax rate is expected to be 22%.

2024 and Beyond Outlook

The company has about $255 million of servicing fees to be installed. Of this, about 5-10% will come through in the fourth quarter, 50-60% will be generated next year and the remaining in 2025.

Further, the company aims to achieve $350-$400 million of servicing fee wins in 2024.

As the company executed a NIR and capital accretive investment portfolio repositioning exercise in the third quarter of 2023 to take advantage of both higher yields and spreads, NIR is expected to be at the higher end of the $550-$600 million range per quarter in 2024.

The company is undertaking several measures and looking into its business model to improve operating efficiency. These transformation and productivity initiatives are expected to help State Street save costs next year.

The company expects CET1 and Tier 1 leverage ratios to be 10-11% and 5.25-5.75%, respectively, in the near term.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, State Street Corporation has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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

Performance of an Industry Player

State Street Corporation belongs to the Zacks Banks - Major Regional industry. Another stock from the same industry, The PNC Financial Services Group, Inc (PNC), has gained 11.8% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.

The PNC Financial Services Group, Inc reported revenues of $5.23 billion in the last reported quarter, representing a year-over-year change of -5.7%. EPS of $3.60 for the same period compares with $3.78 a year ago.

The PNC Financial Services Group, Inc is expected to post earnings of $3 per share for the current quarter, representing a year-over-year change of -14%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.4%.

The PNC Financial Services Group, Inc has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.

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