Can State Street (STT) Maintain Its Earnings Streak In Q3?

State Street Corporation (NYSE:STT) is scheduled to report its third-quarter 2016 results before the market opens on Wednesday, Oct 26.

Last quarter, lower costs driven by a successful expense savings initiative helped State Street to beat the Zacks Consensus Estimate. However, a challenging market environment and a strengthening U.S. dollar adversely impacted the operating revenues.

The earnings beat was followed by a rise of nearly 29% in the share price of State Street during the three months ended Sep 30, 2016. Additionally, the company boasts a decent earnings surprise history, as evident from the chart below:

Earnings Whispers

Our proven model indicates that chances of State Street beating the Zacks Consensus Estimate in the third quarter is high. Note that a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) to have a significantly higher chance of beating estimates. This is the case here, as elaborated below:

Zacks ESP: The Earnings ESP for State Street is +0.80%. This is because the Most Accurate estimate of $1.26 is above the Zacks Consensus Estimate of $1.25.

Zacks Rank: State Street’s Zacks Rank #2 increases the predictive power of ESP. This, along with a positive ESP, makesus reasonably confident of an earnings beat this season.

Analysts seem to be happy with State Street’s business activities in the just concluded quarter. The company witnessed four upward revisions in earnings estimates (versus no downward revisions) over the last 30 days. Notably, the Zacks Consensus Estimate of $1.25 remained stable over the last seven days.

Will State Street succeed in maintaining its earnings streak? Or will a low interest rate environment be a drag on the bottom line? Let’s check out the factors that are likely to influence State Street’s results.

Factors to Impact Q3 Results

Revenues to Improve: State Street expects to witness a modest year-over-year growth in fee revenue (on an operating basis), after considering the market conditions in Jul 2016. However, seasonal reduction in securities finance revenue is anticipated to have occurred in the quarter. Nonetheless, net interest revenue, on an operating basis, is expected to have modestly exceeded the projected range of $2.03–2.13 billion.

Acquisition to Support Results: For the third quarter, the GE Asset Management deal is expected to result in approximately $60 million worth of fee revenue (excluding merger and integration costs). The contribution to net income before tax is anticipated to be modestly positive.

Stable Costs: Expenses are projected to remain flat year over year, on an operating basis. Notably, regulatory and compliance costs, other operating expenses, outside consulting expenses and expenses related to the installation of new business should to have increased during the quarter.

Nonetheless, management plans to reduce its expenses on outside consulting, going forward. In addition, the company targets to generate positive fee-based operating leverage on a year-over-year basis.

NIM under Strain: Net interest margin (NIM) is expected to have witnessed downward pressure during the quarter due to reduction in the Bank of England rate and the continued grind in the portfolio.

Stocks That Warrant a Look

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

Raymond James Financial, Inc. (NYSE:RJF) is slated to release its results on Oct 26. The company has an Earnings ESP of +2.04% and carries a Zacks Rank #2.

Lazard Ltd. (NYSE:LAZ) is scheduled to report its results on Oct 27.It has an Earnings ESP of +3.90% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks Rank #1 stocks here.

Cullen/Frost Bankers, Inc. (NYSE:CFR) has an Earnings ESP of +0.86% and a Zacks Rank #3. It is scheduled to report results on Oct 26.

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