On Sep 12, 2013, we reaffirmed our Neutral recommendation on State Street Corporation (STT). This was based on the company’s positive second-quarter 2013 earnings. However, we remain concerned about the persistent pressure on net interest margin and escalating operating expenses.
On Jul 19, State Street reported second-quarter 2013 earnings per share of $1.24, beating the Zacks Consensus Estimate by a nickel. Results were driven by an improvement in fee income, partially offset by higher operating expenses and a decrease in net interest income. Further, the company’s asset position and capital ratios were robust.
The Zacks Consensus Estimate for 2013 advanced 1.1% to $4.61 per share over the last 60 days. Further, for 2014, the Zacks Consensus Estimate increased 1.2% to $5.27 per share over the same time period. State Street currently carries a Zacks Rank #3 (Hold).
State Street is a sound asset for yield-seeking investors. In second-quarter 2013, the company hiked its dividend by 8.3%. Further, we expect the company’s restructuring programs, along with its strong core servicing and investment management franchises to aid in countering the sluggish economic recovery. Moreover, State Street’s acquisitions will benefit revenue growth going forward.
However, State Street’s top-line growth is expected to be sluggish in the coming quarters due to severe pressure on NIM. We expect NIM to remain compressed on the assumption of an unchanged yield curve and prepayment fees.
Moreover, higher operating expenses are a major concern for State Street. Despite various restructuring efforts, it will likely take some time for the company to reduce expenses and boost overall profitability.
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