State Street's (STT) Q4 Earnings Beat on Higher Revenues

State Street’s STT adjusted fourth-quarter 2018 earnings of $1.68 per share beat the Zacks Consensus Estimate by a penny. However, the figure was 10.2% below the prior-year quarter level.

Results reflected higher net interest income (reflecting rise in interest rates) and fee income, which supported revenue growth. However, increase in non-interest expenses and assets under custody and administration plus assets under management (AUM) decline were the undermining factors.

After considering several non-recurring items, net income available to common shareholders was $398 million or $1.04 per share, up from $343 million or 89 cents per share in the year-ago quarter.

Adjusted earnings of $7.22 per share for 2018 increased 15.3% year over year. The figure lagged the Zacks Consensus Estimate by a penny. Net income available to common shareholders (GAAP basis) was $2.41 billion, up 20.9% from the prior year.

Revenues Improve, Expenses Rise

Total revenues were $2.99 billion, increasing 4.9% year over year. Also, the top line marginally beat the Zacks Consensus Estimate of $2.98 billion.

Total revenues were $11.98 billion, increasing 7.2% from 2017 level. The top line matched the consensus estimate.

Net interest revenues increased 13.1% from the year-ago quarter to $697 million. This upside was mainly driven by higher interest rates and a disciplined liability pricing. Also, net interest margin expanded 17 basis points year over year to 1.55%.

Fee revenues grew 2.6% from the prior-year quarter to $2.29 billion. This uptick was aided by higher management fees, processing fees and other revenue and foreign exchange trading services, partially offset by a decline in servicing fees and securities finance revenues.

Non-interest expenses were $2.47 billion, up 16.1% on a year-over-year basis. The rise was due to increase in all expense components except transaction processing services expenses and acquisition and restructuring costs.

State Street initiated a new expense program and expects to realize $350 million in expense savings in 2019. This will result in 15% reduction of senior managers and workforce reduction of 6% in high cost locations.

As of Dec 31, 2018, total assets under custody and administration were $31.6 trillion, down 4.5% year over year. Moreover, AUM was $2.5 trillion, down 9.7%.

Strong Capital and Profitability Ratios

Under Basel III (Advanced approach), estimated Tier 1 common ratio was 12.1% as of Dec 31, 2018, compared with 14.1% as of Sep 30, 2018.

Return on common equity came in at 7.5% compared with 6.9% in the year-ago quarter.

Our Viewpoint

While the company's new business wins, rising interest rates, strong balance sheet and strategic acquisitions are likely to continue supporting its profitability, mounting expenses, despite cost control efforts, is a major concern as it might hurt bottom-line growth. Also, uncertainty about the performance of capital markets, which is expected to affect its trading services revenues, makes us apprehensive.

State Street Corporation Price, Consensus and EPS Surprise

State Street Corporation Price, Consensus and EPS Surprise | State Street Corporation Quote

 

State Street currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Regional Banks

BB&T Corporation’s BBT fourth-quarter 2018 adjusted earnings of $1.05 per share surpassed the Zacks Consensus Estimate of $1.04. The figure also represents 25% growth from the year-ago tally.

KeyCorp’s KEY fourth-quarter 2018 adjusted earnings of 48 cents per share surpassed the Zacks Consensus Estimate by a penny. Also, the figure compared favorably with earnings of 36 cents recorded in the prior-year quarter.

Riding on higher revenues, U.S. Bancorp’s USB fourth-quarter 2018 adjusted earnings per share of $1.07 outpaced the Zacks Consensus Estimate by a penny. Results were also up 10.3% from the prior-year quarter.

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