Industry Headwinds Would Have Hurt State Street’s Q2 Results

by Trefis Team
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State Street (NYSE: STT) will report its second quarter 2019 earnings on Friday, July 19. Consensus figures points to a 6% decline in revenues year-on-year to $2.87 billion, and a 26% drop in EPS figure to $1.39. Per Trefis, State Street’s stock has a fair value of $75, which is 35% higher than the current market price. We have captured trends in State Street’s Earnings over recent quarters in an interactive dashboard along with our expectations for full-year 2019. You can modify Trefis forecasts to see the impact of changes on State Street’s valuation. Additionally, you can see more Trefis data for financial companies here.

A Quick Look At State Street’s Revenue Sources

State Street reported $12.0 billion in Total Revenues in FY 2018. This included 2 revenue streams.

  • Investment Management: $1.9 billion in FY 2018 (16% of Total Revenues) – This division provides retail and institutional investors with a broad range of equity, fixed income, cash and alternative investment products
  • Investment Servicing: $10.1 billion in FY 2018 (84% of Total Revenues) – It could be sub-divided in 3 segments:
    • Asset Servicing– Includes the fee earned by the bank for serving as the custodian of financial assets on behalf of institutional investors
    • Foreign Exchange & Other Trading– It refers to the revenue from Trading Services and Securities Financing
    • Securities Finance & Other– It consists of fees revenue from structured products business, software licensing and maintenance, among others.

How Have State Street’s Revenues & Expenses Changed Over Recent Quarters?

  • In Q1 2019, State Street reported Total Revenues of $2.9 billion, down 4% from the year-ago period. This was due to a 7% fall in Investment Management revenues and a 6% decline in Investment Servicing revenues y-o-y.
  • Notably, Net Interest Income (NII) increased by 5% y-o-y to $673 million due to higher U.S. interest rates and disciplined pricing.
  • Servicing fees dropped 12% compared to the previous year due to stiff industry-wide competition and lower client activity levels.
  • Although compensation expense recorded a slight decrease in Q1, Total Expenses were marginally up due to higher information systems and communication cost.

State Street’s Key Revenue Drivers

Assets under Custody/Administration (AuC/A): State Street’s AuC/A figure fell from a record high of $34 trillion in Q3 2018 to just $31.6 trillion by the end of the year due to the slump in equity valuation. The figure recovered partially to $32.6 trillion in Q1 2018, and should continue to grow to return to $34 trillion by the end of this year.

Assets under Management (AuM): It is the key driver of Investment Management revenues and has reported an increase of 3% y-o-y in Q1 2019.  However, Investment Management revenues were down by 7% y-o-y, as positive growth in AuM was more than offset by a decrease in management fees. Further, total Assets under Management (AUM) are expected to grow by 5.4% y-o-y in 2019.

State Street’s Outlook For Full Year 2019

  • State Street is expected to report $11.9 billion in Total Revenues for 2019, which is at the same level as previous year. This could be attributed to a slight decrease in Investment services revenues, offset by 3% y-o-y increase in investment management.
  • Although Asset under custody & Administration (AUC/A) is expected to grow by 3.5% y-o-y, decline in servicing fees as a % of AUC/A would reduce Asset Servicing revenues by 1% as compared to 2018. As a result, Investment Servicing revenues for 2019 are expected to be around $10 billion, which is slightly lower than 2018 figure.
  • Total Expenses are expected to see a slight reduction in 2019 as compared to the previous year. However, Net Income would remain unchanged as a higher tax rate is likely to offset the impact of lower expenses.
  • State Street is expected to have repurchased shares worth $300 million in the second quarter. This trend is likely to continue in subsequent quarters and help its EPS figure reach $6.45 for FY 2019.
  • EPS of $6.45 coupled with our forward P/E multiple of 11.6x represents a price estimate of $75 for State Street’s stock – representing a potential upside of 35% for the bank’s stock.

Do not agree with our forecast? Create your own forecast for State Street’s valuation by changing the base inputs (blue dots) on our interactive dashboard.

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