Lower Interest Rates To Hurt State Street (STT) Q4 Earnings

State Street (NYSE:STT) is scheduled to report fourth-quarter and 2019 results on Jan 17, before the market opens. While its revenues are expected to have declined in the quarter, earnings are likely to have witnessed year-over-year improvement.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from new investment servicing wins and growth in assets under management (AUM), partly offset by lower revenues.

State Street boasts an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in all of the trailing four quarters, with a positive surprise of 4.3%, on average.

Moreover, its activities in the fourth quarter encouraged analysts to revise earnings estimates upward. The Zacks Consensus Estimate for its earnings of $1.70 for the quarter has been raised 3.7% over the past 30 days. Also, the figure indicates rise of 1.2% from the year-ago quarter’s reported number.

The consensus estimate for fourth-quarter sales is pegged at $2.92 billion, indicating a 2.1% year-over-year decline.

Now, let’s check the factors that are likely to have impacted State Street’s fourth-quarter results.

Key Factors to Note

Net interest income (NII) may not offer support: The Zacks Consensus Estimate for average interest earning assets is pegged at $185.1 billion for the fourth quarter, which suggests rise of 2.1% from the prior quarter’s reported number. However, overall loan growth remained soft in the quarter. Thus, soft loan growth along with relatively lower interest rates is expected to have hurt the company’s NII to some extent in the fourth quarter.

In fact, management expects NII in the fourth quarter to be down 3-5% sequentially.

Fee income growth likely to be modest: The fourth quarter witnessed a sequential decline in foreign exchange (FX) trading volatility and FX volumes. Given this, the company’s FX trading revenues are expected to have declined in the quarter.

While the amount of securities on loans declined in the quarter due to relatively lower equity trading volumes, the spread between the three-month LIBOR and the Fed funds rate expanded. Thus, State Street’s securities finance revenues are likely to have been sequentially stable in the fourth quarter.

Nonetheless, supported by strong equity market performance, servicing and management fees are expected to have increased in the to-be-reported quarter.

Notably, the company expects servicing fees to be stable sequentially in the fourth quarter, while management fees are projected to be up 1-2%.

Total fee revenues are expected to increase 1-2% from the prior quarter, driven by seasonality related to the Charles River Development (CRD) buyout.

Expenses not of much help: State Street’s expenses have remained elevated over the past few quarters mainly due to higher compensation and employee benefit costs as well as acquisition and restructuring costs.

While the company’s expense-saving program is expected to result in $400 million in cost savings in 2019 through workforce reduction, overall expenses are expected to have remained elevated in the fourth quarter. Moreover, management expects fourth-quarter operating expenses (non-GAAP basis) to remain flat sequentially.

Earnings Whispers

According to our quantitative model, it cannot be conclusively predicted 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 sports a Zacks Rank #1 (Strong Buy). While this increases the predictive power of ESP, we also need a positive ESP to be confident of an earnings surprise call.

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 in their upcoming releases, per our model.

TD Ameritrade Holding Corporation (NASDAQ:AMTD) has an Earnings ESP of +0.39% and a Zacks Rank #3 at present. The company is slated to release results on Jan 21.

Commerce Bancshares, Inc (NASDAQ:CBSH) is slated to release results on Jan 22. It currently has an Earnings ESP of +0.12% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Associated Banc-Corp (NYSE:ASB) is slated to release results on Jan 23. It presently has an Earnings ESP of +1.10% and a Zacks Rank #3.

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