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Will Rising Expenses Hurt State Street (STT) Earnings in Q3?

State Street CorporationSTT is scheduled to report third-quarter 2015 results on Oct 23, before the market opens.

Last quarter, a rise in foreign exchange trading revenues helped State Street meet the Zacks Consensus Estimate. However, a fall in net interest income and higher operating expenses were the undermining factors.

Moreover, State Street recorded an average positive surprise of 7.92% for the trailing four quarters. Will the company manage to outpace estimates this earnings season? Notably, our quantitative model doesn't call for an earnings beat.

Here is what our model indicates:

The chance of State Street beating the Zacks Consensus Estimate in the third quarter is less. This is because it doesn't have the right combination of the two key ingredients - positive Earnings ESP and a Zacks Rank #3 (Hold) or better - for increasing the possibility of an earnings surprise.

Zacks ESP: The ESP for State Street is -0.80%. This is because the Most Accurate estimate currently stands at $1.24 per share, while the Zacks Consensus Estimate is pegged higher at $1.25.

Zacks Rank: State Street carries a Zacks Rank #4 (Sell), which further lowers the chance for an earnings beat.

Factors to Impact Q3 Results

Despite completion of its cost-saving initiatives in 2014, State Street is still grappling with mounting operating expenses, led by higher regulatory and compliance costs. Though management guided a fall in other expenses, its focus on investment in technology to replace labor should keep costs high in the quarter.

Further, on revenue front, a strong U.S. dollar is likely to negatively impact State Street's servicing fees. Also, growth in net interest revenue ("NIR") should remain muted owing to margin compression, an estimated flat yield curve and unchanged prepayment fees.

Additionally, management intends to lower excess deposits in the second half of 2015. A $10-billion fall in average excess deposits will adversely impact NIR in the range of $4-$5 million in the third and fourth quarters of 2015.

However, we believe foreign exchange trading revenues will grow in the quarter, driven by higher volatility in the currency market. Also, securities finance revenue should increase, helped by higher spreads and new business pipeline. Therefore, State Street's overall top line is expected to witness stable growth.

State Street was unable to impress analysts with its level of activities during the quarter. As a result, the Zacks Consensus Estimate for the quarter fell nearly 1% to $1.25 per share over the last 7 days.

Stocks to Consider

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

UMB Financial Corporation UMBF has an Earnings ESP of +1.49% and a Zacks Rank #3. It will report results on Oct 27.

EverBank Financial Corp. EVER , with an Earnings ESP of +2.78% and a Zacks Rank #3, is scheduled to report results on Oct 28.

The Earnings ESP for Ally Financial Inc. ALLY is +1.92% and it has a Zacks Rank #2 (Buy). The company is slated to release results on Oct 29.

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STATE ST CORP (STT): Free Stock Analysis Report

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ALLY FINANCIAL (ALLY): 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.


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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