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Rates, Muted Fee Income to Mar State Street (STT) Q2 Earnings

State Street STT is scheduled to report second-quarter 2019 results on Jul 19, before market open. Its revenues and earnings for the to-be-reported quarter are expected to decline year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results were aided by higher net interest income and rise in assets under management (AUM) balance. However, increase in expenses and lower fee income were the undermining factors.

Moreover, State Street boasts an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average beat being 1.6%.

State Street Corporation Price and EPS Surprise

State Street Corporation price-eps-surprise | State Street Corporation Quote

In an investors’ conference in mid-June, the company’s CFO, Eric Aboaf said, “Rates are down 50 basis points, FX volatility continues to come down, there’s been spread compression in a number of areas. So we’re going to have a challenging quarter.”

Therefore, the Zacks Consensus Estimate for earnings of $1.40 for the to-be-reported quarter moved 2.8% downward over the past seven days. Also, the figure suggests a decline of 31.7% from the year-ago reported number.

The consensus estimate for sales is $2.85 billion for the second quarter, indicating 5.7% year-over-year decline.

Factors at Play

Net interest income to decline: The Zacks Consensus Estimate for average interest earning assets of $178.4 billion for the second quarter suggests a decline of 7.3% sequentially. Though overall lending activities were modest during the quarter, the Federal Reserve’s dovish stance led to lower rates. Thus, State Street is expected to record a decline in net interest income (NII).

Further, Aboaf stated that the company’s NII, which accounts for almost one-fifth of total revenues, will fall 8% on a sequential basis due to the “significant turn in the interest-rate environment.” This is worse than the prior outlook of 1-2% sequential decrease provided by management.

Dismal fee income: Foreign exchange (FX) trading volumes and volatility remained low during the second quarter. Thus, growth in the company’s FX trading revenues is expected to remain muted.

Further, the spread between the three-month LIBOR and the Fed funds rate contracted during the second quarter. Also, at the end of the quarter, the spreads turned negative, given the expectations of rate cut. Thus, State Street’s securities finance revenues might decline, despite the second quarter being seasonally favorable.

Nonetheless, decent equity markets performance seems to have provided support to servicing and management fees during the second quarter. Though pricing pressure remains a concern, State Street’s servicing and management fees are expected to witness slight improvement from the prior quarter.

In fact, management expects fee income to be down 1-2% owing to muted trade volume and reduced FX volatility.

Expenses not of much help: Management expects operating expenses to either remain stable or increase less than 1% in the second quarter on a sequential basis.

Earnings Whispers

According to our quantitative model, we cannot conclusively predict whether State Street will be able to beat the Zacks Consensus Estimate this time. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for State Street is 0.00%.

Zacks Rank: The company currently has a Zacks Rank #5 (Strong Sell).

Stocks That Warrant a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat this quarter, per our model.

The Earnings ESP for M&T Bank MTB is +0.20% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Jul 18.

BB&T Corp. BBT is slated to release results on Jul 18. It has an Earnings ESP of +1.24% and currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

TD Ameritrade Holding Corporation AMTD is slated to release results on Jul 22. It currently has an Earnings ESP of +0.03% and a Zacks Rank #3.

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