How Did State Street Perform in Q1 2019?

by Trefis Team
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State Street (NYSE:STT) published its Q1 2019 results on April 23. This note details analysis of Q1 2019 earnings along with Trefis’ forecasts for State Street. We have summarized our full year expectations for State Street based on the company’s guidance and our own estimates, on our interactive dashboard How did State Street perform in Q1 2019? You can modify any of our key drivers to gauge the impact changes would have on its valuation. In addition, here is more Financial Services data.

In Q1 2019, State Street saw EPS of $1.18 and returned $480 million to shareholders ($300 million in share repurchase and $180 million in dividends).

How Was State Street’s Revenue In Q1 2019?

  • State Street’s Total Revenue ($2.9B) decreased by 4% y-o-y and 3% Q-o-Q in Q1 2019. This could be attributed to challenging industry conditions, lower average equity market levels and FX translation, which was partially offset by new business (CRD) and Net Interest Income.
  • Servicing fees revenue ($1.25B) saw a decrease of 12% y-o-y in Q1 due to fee concessions and lower client activity.
  • Net Interest Income (NII) of $673 million was was by 5% y-o-y in Q1 due to higher U.S interest rates and disciplined pricing. However, NII was down 3% sequentially due to lower deposit partially offset by rate hikes and growth in the investment portfolio.
  • Net Interest Margin (1.54%) increased by 14 bps in Q1 2019.

Key Drivers Of Revenue:

Asset Under Custody and Administration (AUC/A)

  • A fall in AUC/A ($32.6 Trillion) by 2% in Q1 2019 was caused by negative impact of FX translation and client transition.

Servicing & Administration Fee as % of Assets Under Custody

  • State Street is highly sensitive to this driver because asset custody is the firm’s primary business. Fees as a percentage of assets have seen a downward trend due to competition and lower client activity.
  • It is taking several initiatives like client coverage program and segment growth initiatives to focus on its strategic priority of improving servicing fee growth.

How Were State Street’s Total Expenses in Q1 2019?

  • Total Expense ($2.3B) increased by 1% in Q1 2019 mainly due to an increase in information systems and communication expense (up by 15%) and amortization & other tangible assets (up by 20%), partly offset by a decrease in compensation and benefits (2%) and transaction processing fees (5%).

Key Expense Drivers

Compensation and Employee Benefits

  • This constitutes 54% of total expenses, and is therefore a major driver.
  • A year-on-year reduction of 2% in Q1 was mainly due to savings from resource discipline, process re-engineering, lower net contractor spend, partially offset by new business support cost.
  • We expect it to follow a downward trend in subsequent quarters.

What’s State Street’s 2019 Outlook?

  • We expect State Street’s revenue from Investment Services to increase by 3.3% in 2019 mainly due to growth in AUC/A and no changes in servicing rate.
  • Growth in total revenue is expected to be around 3.2%, mainly due to Investment Services and revenue generated by CRD and STT services. CRD is expected to convert several front-to-back platform integration contracts in 2019.
  • State Street is expected to see growth of 14% in pre-tax profit in 2019. However, heightened competition could negatively affect EBT margin and reduce pre-tax profits.
  • State Street’s EPS has improved steadily thanks to billions of dollars in share repurchases each year. We expect this to contribute to an EPS figure of $7.40 for full-year 2019.
  • Using the EPS forecast of $7.40 , and a forward P/E multiple of 12, we estimate the fair value for State Street’s stock to be $89.

 

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