State Street (STT) Q3 Earnings Beat On Higher Fee Income

A rise in fee income drove State Street Corporation’s (NYSE:STT) third-quarter 2016 operating earnings of $1.35 per share, which handily outpaced the Zacks Consensus Estimate of $1.25. Also, the reported figure was up 17.4% year over year.

Better-than-expected results were supported by a rise in net interest income and fee income. Further, asset growth supported the results. However, lower trading services revenue and an increase in expenses hurt results in the quarter.

After considering certain non-recurring items, net income available to common shareholders came in at $507 million or $1.29 per share, down from $539 million or $1.31 per share in the year-ago quarter.

Revenues Rise Marginally, Expenses High

Revenues, on a GAAP basis, totaled $2.26 billion, up marginally from the prior-year quarter. However, the top line came in lower than the Zacks Consensus Estimate of $2.72 billion.

Net interest revenue, on an operating basis, inched up 1.5% from the year-ago quarter to $537 million. The rise was mainly driven by higher market interest rates and disciplined liability pricing, partially offset by lower interest earning assets.

Also, net interest margin increased 11 basis points year over year to 1.06%.

Fee revenues came in at $2.21 billion, up 4.6% from the prior-year quarter. All components of fee income showed improvement except total trading services revenue.

On an operating basis, non-interest expenses were $1.91 billion, up 1.7% on a year-over-year basis. Increase in compensation and employee benefits costs, and information systems and communications expenses were partly offset by lower occupancy costs and other expenses.

As of Sep 30, 2016, total assets under custody and administration were $29.2 trillion, up 7% year over year. Moreover, assets under management were $2.4 trillion, up 11% year over year.

Capital and Profitability Ratios Improve

Under Basel III (Advanced approach), the estimated Tier 1 common ratio was 12.3% as of Sep 30, 2016, up from 12.0% as of Jun 30, 2016.

Return on common equity (on an operating basis) came in at 11.1% compared with 10.0% in the year-ago quarter.

Share Repurchases

During the reported quarter, State Street repurchased shares worth $325 million at an average price of $69.03 per share. This was part of the company’s buyback plan, which authorized the purchase of up to $1.4 billion of stock through second-quarter 2017.

Our Viewpoint

We expect State Street’s restructuring programs, along with stable core servicing and investment management franchises, to help offset its top-line pressure. Further, the acquisition of GE Asset Management is expected to lead to revenue synergies in the quarters ahead. Also, the company remains on track to achieve its cost-saving targets.

However, a low interest rate environment and persistent fall in net interest revenue are expected to remain a drag on the company’s top line in the quarters ahead.

Currently, State Street carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Regional Banks

A notable rise in top line drove BB&T Corporation’s (NYSE:BBT) third-quarter 2016 adjusted earnings of 76 cents per share. This comfortably beat the Zacks Consensus Estimate of 70 cents.

KeyCorp.’s (NYSE:KEY) third-quarter 2016 adjusted earnings of 30 cents per share outpaced the Zacks Consensus Estimate of 26 cents. The figure was up 15.4% from the prior-year quarter.

A rise in revenues drove SunTrust Banks, Inc.'s (NYSE:STI) third-quarter 2016 earnings of 91 cents per share, which outpaced the Zacks Consensus Estimate of 89 cents. The prior-year quarter result excluded 11 cents of benefit from discrete items.

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