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Low Interest Rates to Hurt State Street's (STT) Q3 Earnings

State Street STT is slated to announce third-quarter 2020 results on Oct 16, before market open. Its revenues and earnings in the quarter are expected to have declined on a year-over-year basis.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from lower expenses and improvement in fee income, partly offset by a decline in net interest income (NII) and higher provisions.

State Street boasts an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, with a surprise of 16%, on average.

State Street Corporation Price and EPS Surprise

 

State Street Corporation Price and EPS Surprise

State Street Corporation price-eps-surprise | State Street Corporation Quote

Now, let's take a look at how things have shaped up for the to-be-reported quarter.

Net Interest Income: The Zacks Consensus Estimate for the company’s average interest earning assets is pegged at $262.77 billion for the to-be-reported quarter, which suggests a 7.3% sequential rise. However, with the economic slowdown and the pandemic-related scare, the overall demand for loans was soft during the quarter. Thus, muted loan growth along with near-zero interest rates are likely to have hampered State Street’s NII in the to-be-reported quarter.

Notably, management expects NII to decline 9-11% from the prior quarter’s reported figure, given the impact of the continued lower long-end rates on the investment portfolio. Moreover, the consensus estimate for NII (on a fully taxable-equivalent basis) of $498 million indicates a 25.4% sequential fall.

Fee Income: In the third quarter, foreign exchange (FX) trading volatility declined sequentially, while FX volumes were mixed. Thus, on a sequential basis, State Street’s FX trading services revenues are likely to have recorded a fall. The consensus estimate for the same indicates a sequential decline of 18.6% to $280 million.

Moreover, given the contraction in the spread between the three-month LIBOR and Fed funds rate along with the impact of seasonality, securities finance revenues are likely to have been negatively impacted in the quarter. The Zacks Consensus Estimate for the same of $90 million suggests a 2.2% decline from the prior quarter.

However, owing to the strong equity market performance, servicing and management fees are expected to have been positively impacted in the to-be-reported quarter. The consensus estimate for servicing fees of $1.30 billion indicates a 2.1% sequential rise. Likewise, the consensus estimate for management fees of $455 million suggests a 7.1% rise.

Expenses: Due to higher information systems and communications expenses as well as acquisition and restructuring costs, the company has been witnessing a persistent rise in expenses over the past few years. However, driven by the success of its expense-saving program, State Street’s operating expenses are likely to have remained manageable in the third quarter.

What the Zacks Model Reveals

According to our quantitative model, the chances of State Street beating the Zacks Consensus Estimate this time are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better.

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 +0.56%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Q3 Earnings & Sales Projections

The Zacks Consensus Estimate for State Street’s earnings of $1.44 for the third quarter has been revised marginally upward over the past seven days. The figure indicates a fall of 4.6% from the year-ago reported number.

The consensus estimate for sales is pegged at $2.77 billion, indicating a 4.4% year-over-year decline.

Other Stocks That Warrant a Look

Here are some other finance stocks that you may want to consider as these too have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for CullenFrost Bankers, Inc. CFR is +2.61% and the company carries a Zacks Rank of 3, at present. The company is slated to report quarterly results on Oct 29. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huntington Bancshares Incorporated HBAN is set to release earnings figures on Oct 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +2.88%.

The Earnings ESP for Civista Bancshares, Inc. CIVB is +26.31% and the company carries a Zacks Rank #2 (Buy), currently. It is scheduled to report quarterly numbers on Oct 23.

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Huntington Bancshares Incorporated (HBAN): Free Stock Analysis Report
 
State Street Corporation (STT): Free Stock Analysis Report
 
CullenFrost Bankers, Inc. (CFR): Free Stock Analysis Report
 
Civista Bancshares, Inc. (CIVB): 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 Nasdaq, Inc.

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