State Street Q1 Earnings Lag on Higher Expenses - Analyst Blog

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State Street Corp. ( STT ) reported first-quarter operating earnings of 99 cents per share, which missed the Zacks Consensus Estimate by a penny due to increased non-interest expenses and lower interest revenues. However, the reported figure was up 3% from the prior-year quarter figure of 96 cents.

Our proven model predicted that State Street may not post an earnings beat as it did not have the right combination of two key components - positive Earnings ESP and a Zacks Rank of #3 (Hold) or higher rank. While State Street did have a Zacks Rank #3, its Earnings ESP was 0.00%.

Lower-than-expected results were mainly due to a fall in net interest income and higher-than-expected operating expenses, partly offset by increased fee income. Further, deteriorating profitability ratios was a dampener. However, improvement in asset position and capital ratios were the positives.

After considering certain non-recurring items, net income applicable to common shareholders was $356 million, down 22% year over year.

Performance in Detail

Revenues on an operating basis came in at $2.56 billion, up 4% from the prior-year quarter. Further, it beat the Zacks Consensus Estimate of $2.53 billion.

Net interest revenue on an operating basis fell 1% year over year to $572 million. The fall was mainly due to lower yields on earning assets, partly offset by lower interest expense. Likewise, net interest margin was 1.24% in the quarter, down 7 basis points year over year.

Fee revenues came in at $2.0 billion, increasing 5% from the prior-year quarter. The rise was attributable to increase in servicing fees, management fees, processing and other revenues as well as securities finance fees, partially offset by lower total trading services revenues.

On an operating basis, non-interest expenses increased 6% from the year-ago quarter to $1.91 billion. All the operating expense components increased except for occupancy costs.

Total assets under custody and administration were $27.48 trillion as of Mar 31, 2014, up 8% year over year. Moreover, assets under management were $2.38 trillion, up 9% from the prior-year quarter.

Capital and Profitability Ratios

State Street's capital ratios improved while profitability ratio deteriorated. As of Mar 31, 2014, Tier 1 capital ratio was 18.2%, up from 18.0% as of Mar 31, 2013. Likewise, Tier 1 common to risk-weighted assets increased to 16.4% as of Mar 31, 2014 from 16.0% as of Mar 31, 2013.

Further, under Basel III final rule (Advanced approach), the estimated Tier 1 common ratio was 13.2% as of Mar 31, 2014, up from 10.6% as of Mar 31, 2013.

Return on common equity (on an operating basis) came in at 8.8%, down from 8.9% in the year-ago quarter.

Capital Deployment Activities

During the reported quarter, State Street repurchased 6.1 million shares for $420 million. This was part of the company's buyback plan authorizing purchase of up to $2.1 billion worth of stock through Mar 13, 2014.

Further, in March, State Street received the Federal Reserve's approval for its 2014 capital plan that included share repurchases up to $1.7 billion between the second quarter of 2014 and the first quarter of 2015. Additionally, the company intends to raise its quarterly cash dividend by more than 15% to 30 cents per share.

Our Viewpoint

We anticipate State Street's restructuring programs, along with stable core servicing and investment management franchises, to help offset its financial weakness. Moreover, enhanced capital deployment initiatives reinforce the company's priority to enhance shareholders' value. However, a low interest rate environment, increased expenses and a persistent fall in net interest revenue are expected to drag State Street's top line in the quarters ahead.

Performance of Other Major Regional Banks

Among other major regional banks, KeyCorp. ( KEY ), SunTrust Banks, Inc. ( STI ) and The Bank of New York Mellon Corp. ( BK ) surpassed the Zacks Consensus Estimate. While SunTrust benefited from prudent expense management and lower provisions, KeyCorp's results were driven by lower expenses, a decline in provision for loan and lease losses, and higher fee income.

For BNY Mellon, results were aided by growth in net interest revenue and fee income, along with decreased operating expenses. However, lower benefits from provisions acted as a dampener.



BANK OF NY MELL (BK): Free Stock Analysis Report

KEYCORP NEW (KEY): Free Stock Analysis Report

SUNTRUST BKS (STI): Free Stock Analysis Report

STATE ST CORP (STT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: BK , KEY , STI , STT

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