State Street Lowers Revenue Outlook for 2Q19 on Rate Cut

The outlook for State Street Corporation’s STT second-quarter 2019 revenues has been changed recently. As expectations of the Federal Reserve reducing interest rates this year increases, the company’s CFO, Eric Aboaf, estimates that revenues in the to-be-reported quarter will be lower than expected.

At an industry conference, Aboaf mentioned that the bank’s net interest income (NII), which accounts for almost one-fifth of total revenues, will decline 8% in the second quarter on a sequential basis due to the “significant turn in the interest-rate environment”.

During the release of first-quarter results, the company estimated that second-quarter NII would be down only 1-2%.

Similarly, now, fee income is projected to be down 1-2% due to muted trade volume and lesser FX volatility. This is down from the prior guidance that says fee revenues in the second quarter would be either flat or up 1% sequentially.

Looking at the current economic scenario, Aboaf stated, “Rates are down 50 basis points, FX volatility continues to come down, there’s been spread compression in a number of areas. So we’re going to have a challenging quarter.”

Since the announcement of this dismal outlook, shares of State Street have declined almost 4%.

Probably, the first rate cut of 2019 will take place in July. On this expectation, many investors have gotten rid of bank stocks in order to protect themselves from the effect that interest rate changes have on the banking sector.

Notably, there is a complex relationship between interest rates and banks’ bottom line. While on one hand, decline in rates leads to compressed margins, it stimulates the economy on the other hand. This, in turn increases the demand for financial products.

Banks that have significantly greater deposits than loans are affected by these rate cuts more.

Notably, Aboaf also added, “We’ve continued to see a rotation from non-interest bearing into interest bearing deposits, and that’s been costly. On the other hand, the flattening yield curve this quarter . . . has resulted in lower reinvestment yields.”

Like State Street, even Morgan Stanley MS estimates that its securities business will not do as great in the second quarter as it did in the first.

Along with these two, other banking giants like Citigroup C, Bank of America Corporation BAC and JPMorgan Chase signaled investors that the trading conditions in the second quarter will be tough.

While State Street remains well positioned with respect to its fundamental business activities, given its significant global exposure and a broad array of innovative products and services, consistently increasing expenses mainly because of higher compensation costs remain a major headwind. This is expected to hurt the company's bottom-line growth to some extent.

Shares of the company have lost 13.6% over the past six months against 9.9% growth of the industry.

Currently, the stock carries a Zacks Rank #5 (Strong Sell).

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

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