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Why Is State Street Corporation (STT) Down 3.8% Since Last Earnings Report?

It has been about a month since the last earnings report for State Street Corporation (STT). Shares have lost about 3.8% 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 Corporation 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 Q4 Earnings Beat, Revenues & Costs Decline

State Street’s fourth-quarter 2020 adjusted earnings of $1.69 per share outpaced the Zacks Consensus Estimate of $1.57. However, the figure was 14.6% lower than the prior-year level.

Results for the reported quarter reflect new investment servicing wins of $205 billion, improvement in fee income and lower expenses. However, a decline in net interest income mainly due to lower rates was a major headwind.

Results excluded certain non-recurring items. After considering those, net income available to common shareholders was $498 million, up 1.2% from the year-ago quarter.

For 2020, adjusted earnings of $6.70 per share surpassed the Zacks Consensus Estimate of $6.58 per share. The figure increased 8.6% year over year. Net income available to common shareholders (GAAP basis) was $2.26 billion, up 12.3% year over year.

Revenues & Costs Decline

Total revenues for the quarter were $2.92 billion, decreasing 4.3% year over year. However, the top line beat the Zacks Consensus Estimate of $2.83 billion.

For the year, revenues were $11.70 billion, down marginally year over year. The figure surpassed the Zacks Consensus Estimate of $11.62 billion.

Quarterly net interest revenues were $499 million, down 21.5% from the year-ago quarter. The fall was mainly due to lower market rates, partially offset by higher investment portfolio and loan balances, and growth in deposits.

NIM decreased 52 basis points year over year to 0.84%.

Total fee revenues grew 2% from the prior-year quarter to $2.42 billion. The rise was mainly driven by strong foreign exchange trading revenues, and higher servicing and management fees, partly offset by a decline in securities finance and software and processing fees.

Non-interest expenses were $2.28 billion, down 5.4% from a year ago. The decline was primarily due to lower compensation and employee benefits costs along with a fall in acquisition and restructuring costs, and other expenses. Excluding notable items, adjusted expenses increased marginally to $2.13 billion.

Provision for credit losses was nil in the reported quarter against $3 million in the prior-year quarter.

Asset Balances Improves

As of Dec 31, 2020, total assets under custody and administration were $38.8 trillion, up 12.9% year over year.  The rise was mainly due to higher market levels, net new business installations and client flows.

Also, assets under management were $3.5 trillion, up 11.3% from the prior-year figure. The growth was driven largely by higher market levels and net inflows from exchange traded funds (ETFs) and cash, partly offset by institutional net outflows.

Capital and Profitability Ratios Strong

Under Basel III (Standardized approach), estimated Tier 1 common equity ratio was 12.3% as of Dec 31, 2020, compared with 11.7% in the corresponding period of 2019.

Return on common equity was 8.4% compared with 9.0% in the year-ago quarter.

2021 Outlook

The company’s outlook is based on certain assumptions. These include normalizing FX market volatility and equity markets up 7-8% by year end.  

The company anticipates the impact of money market fee waivers (net of distribution expenses) to be $5-$10 million per quarter.

Given the impact of continued lower long end rates on the investment portfolio, management expects NII to decline 14-17%.

Fee revenues are expected to be flat to up 2% and includes serving fees growing at the top end of 3-5% range. Excluding FX trading revenues, fee income is projected to be up 3-5%.  

Excluding notable items, overall expenses are expected to be flat to down 1%. This is expected to be driven by focus on further process automation and organizational simplification, and real estate footprint reduction across 20 sites.

Effective tax rate is expected to be 17-19%.

Medium-Term Targets (to be achieved by 2023-end)

Including the impact of the CRD buyout, the company expects revenue increase of 4-5%. Pre-tax margin is expected to be 30%. Management expects earnings per share 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 estimates review.

VGM Scores

At this time, State Street Corporation has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, 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.

Outlook

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


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