State Street Stock To Beat Consensus In Q3?

State Street (NYSE: STT) is scheduled to report its fiscal Q3 2021 results on Monday, October 18. We expect State Street to top the earnings and revenue expectations. The custody banking giant surpassed the consensus estimates in the last quarter, with revenues increasing by 3% y-o-y to $3 billion. The growth was because of higher servicing fees and management fees, partially offset by a drop in net interest income (NII). While the servicing fees and management fees benefited from an increase in Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) respectively, NII was down due to the continued effect of the lower interest rate environment. Further, the bank posted an adjusted net income of $728 million in the quarter – up 10% on a year-on-year basis, primarily due to a decrease in operating expenses as a % of revenues and loan loss reserve release. We expect the same trend to continue in the third quarter.

Our forecast indicates that State Street’s valuation is $95 per share, which is 6% above the current market price of close to $90. Our interactive dashboard analysis on State Street’s Earnings Preview has more details. 

(1) Revenues expected to be just ahead of the consensus estimates

State Street’s revenues for full-year 2020 were $11.7 billion – slightly below the year-ago period. While the bank reported a 4% y-o-y growth in total fees income, it was offset by an 11% drop in NII.

• STT generates close to 80% of the total revenues from fees income. Further, asset servicing fees and management fees together constitute around three-fourths of the total fees income. The company reported a 4% y-o-y increase in the fee income to $9.5 billion in 2020, driven by a 2% and 6% increase in the asset servicing fees and management fees, respectively. Notably, the asset servicing fee is charged as a % of Assets under Custody & Administration (AuC/A) and the management fee is levied as a % Assets under Management (AuM). Both the AuC/A and AuM witnessed strong growth in the year, benefiting the fees income. The same trend was observed in the first and second quarter of 2021, with the fees income improving by 4% y-o-y and 6%, respectively. The bank’s AuC/A touched $42.6 trillion in Q2 –10% more than the December end, coupled with a 12% growth in AuM to $3.9 billion over the same period. We expect the same momentum to continue in the third quarter as well.
• While the NII generates close to 22% of the total revenues, its revenues share decreased to 19% in 2020 due to the impact of the interest rate headwinds. The company reported NII of $2.2 billion in the year – down 14% y-o-y. The revenue stream continued to suffer in the first and second quarter, with a 30% y-o-y and 16% drop, respectively. We expect the third-quarter results to be on similar lines.
• Overall, we expect State Street’s revenues to touch $11.9 billion for FY2021.

Trefis estimates State Street’s fiscal Q3 2021 revenues to be around $2.98 billion, marginally above the $2.96 billion consensus estimate. We expect the total fees income to drive the third-quarter results.

Moving forward, we expect the AuC/A and AuM to maintain their growth trajectory over the subsequent quarters. Further, the company is trying to augment its fee income by undertaking strategic acquisitions. Notably, it announced the acquisition of Mercatus and Brown Brothers Harriman’s investor services business in September. That said, the low-interest rates are unlikely to see an immediate revival to the pre-Covid-19 levels. Hence the NII is likely to suffer for some more time. Our dashboard on State Street’s revenues offers more details on the company’s operating segments along with our forecast for the next two years.

2) EPS is likely to beat the consensus estimates

State Street Q3 2021 adjusted earnings per share (EPS) is expected to be $2.01 per Trefis analysis, almost 5% above the consensus estimate of $1.92. The bank’s adjusted net income grew 12% y-o-y to $2.26 billion in 2020, mainly due to a decrease in operating expenses as a % of revenues. The profitability numbers suffered in the first quarter of 2021 due to higher operating expenses (increase in compensation costs and information systems and communications expenses). However, the expense figure again decreased in the second quarter, leading to a 10% y-o-y growth in net income. We expect the same trend to drive the third-quarter results.

Going forward, we expect State Street’s net income margin to see some improvement in FY2021, leading to an adjusted net income of $2.4 billion – up 7% y-o-y. This will likely result in an EPS of $7.18.  

(3) Stock price estimate 6% higher than the current market price

We arrive at State Street’s valuation, using an EPS estimate of around $7.18 and a P/E multiple of just above 13x in fiscal 2021. This translates into a price of $95, which is 6% above the current market price of around $90. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

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