What To Expect From State Street Through 2018 Following Q1 Results

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State Street (NYSE:STT) reported results for the first quarter of 2018 late last week, which were largely in line with investor expectations. We have summarized State Street’s Q1 earnings and also detailed the major takeaways from the announcement in our interactive dashboard for the company, the key parts of which are captured in the charts below.

While the custody banking giant gained from an improved interest rate environment and from record new asset servicing mandates, its asset management unit had an overall weak quarter due to industry headwinds. The bank did well to report revenues in excess of $3 billion for the first time ever, but the gains did not reach the bottom line due to seasonally higher compensation costs and negative exchange rate movements.

State Street remains a strong financial institution with ample scope for growth in the custody banking and asset management industries. Additionally, the bank is likely to return more cash to investors at the end of the Fed’s stress tests for this year as a recent bill eased its capital requirements. Taking this into account, we maintain a price estimate of $110 for State Street’s stock, which is about 10% ahead of the current market price.

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See our full analysis of State Street

Improving Interest Margins, Growing Asset Base To Continue To Boost Top Line

The Fed’s rate hike process has helped the interest rate environment recover steadily from the record lows seen in 2014-2015. State Street’s net interest margin has climbed considerably from 1.08% in Q4 2016 to 1.43% in Q1 2018. At the same time, the bank’s total interest-earning assets reversed the decline they witnessed over the last two quarters to trend upwards in Q1 2018. Taken together, this helped quarterly net interest income increase to $658 million – the highest since late 2012. Net interest income contributed almost 22% of State Street’s total revenues in Q1 2018 – up from just 19% in Q1 2017.

Asset Management Revenues Trend Higher Despite Sizable Outflows

State Street’s total assets under management (AUM) dipped marginally in Q1 2018, falling from $2.78 trillion at the end of 2017 to $2.73 trillion now. The decline was a result of net outflows of $26 billion from its fund offerings, coupled with the negative impact of lower market valuations on the asset base. Notably, equity funds saw investors moving out as much as $55 billion of their cash – the impact of which was mitigated by net inflows of $20 billion into fixed-income funds. However, the division’s revenues increased sequentially due to higher performance fees as well as due to the adoption of new revenue recognition rules.

Record New Mandates Helps Custody Banking Fees

State Street’s Total Assets under Custody / Administration (AUC/A) reached a record $33.3 trillion at the end of Q1 2018 thanks to record new mandates worth $1.3 trillion for the period. The new mandates more than made up for a decline in the asset base due to lower market valuations. The single biggest growth driver for custody assets remained collective funds – which includes ETFs. Collective funds are now responsible for almost 30% of State Street’s total AUC/A – up from less than 27% a year ago.

We expect State Street to report EPS of around $7.60 for full-year 2018. Taken together with a P/E ratio of 14.5 (which we believe is appropriate for the custody banking giant), this works out to a price estimate of $110 for State Street’s shares, which is about 10% ahead of the current market price.

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