It has been about a month since the last earnings report for State Street (STT). Shares have lost about 10% 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 the most recent earnings report in order to get a better handle on the important catalysts.
State Street’s Q1 Earnings Beat Estimates, Assets Balance Improves
State Street’s first-quarter 2019 adjusted earnings of $1.24 per share handily beat the Zacks Consensus Estimate of $1.19. However, the figure was 27.2% below the prior-year quarter level.
Results reflect lower fee income, rise in expenses and decline in assets under custody and administration. However, higher net interest income (reflecting rise in interest rates) and rise in AUM acted as tailwinds.
After considering several non-recurring items, net income available to common shareholders was $452 million or $1.18 per share, down from $603 million or $1.62 per share in the year-ago quarter.
Revenues Down, Expenses Rise
Total revenues were $2.93 billion, decreasing 4.1% year over year. However, the top line beat the Zacks Consensus Estimate of $2.91 billion.
Net interest revenues grew 4.7% from the year-ago quarter to $673 million. This upside was mainly driven by higher interest rates and disciplined liability pricing, partly offset by lower average deposit balances. Also, net interest margin increased 14 basis points year over year to 1.54%.
Fee revenues declined 6.4% to $2.26 billion. This fall was mainly due to decrease in all components except for processing fees and other revenues.
Non-interest expenses were $2.29 billion, up 1.1% on a year-over-year basis. This rise was due to rise in information systems and communications costs, and amortization of other intangible assets. Excluding notable items, adjusted expenses declined 2%.
As of Mar 31, 2019, total assets under custody and administration were $32.6 trillion, down 1.9% year over year. However, AUM was $2.8 trillion, up 2.8%.
Strong Capital and Profitability Ratios
Under Basel III (Standardized approach), estimated Tier 1 common ratio was 11.5% as of Mar 31, 2019, compared with 10.8% as of Mar 31, 2018.
Return on common equity came in at 8.7% compared with 12.8% in the year-ago quarter.
Share Repurchase Update
During the reported quarter, State Street repurchased $300 million worth of shares. This was part of its 2018 capital plan.
Net interest income is expected to decrease 1-2% in second-quarter 2019 on a sequential basis. In 2019, NII is expected to remain relatively flat on a year-over-year basis.
Management expects expenses to either remain stable or increase less than 1% in the second quarter on a sequential basis. In 2019, the company targets to reduce underlying expenses by 1% through 4% productivity savings.
Fee revenues in second-quarter 2019 are expected to be flat or up 1% sequentially.
Tax rate is estimated to be 17-19% in 2019.
Including the impact of the Charles River Development buyout, the company expects revenues to increase 4-5%.
Pre-tax margin is expected to improve 2%. Management expects EPS growth of 10-15% and ROE of 12-15%.
Total payout ratio is expected to be greater than or equal to 80%.
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 -7.07% due to these changes.
At this time, State Street has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
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 #4 (Sell). We expect a below average return from the stock in the next few months.
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