State Street Stock To Beat The Earnings Consensus In Q4?

State Street (NYSE: STT) is scheduled to report its fiscal Q4 2021 results on Wednesday, January 19, 2022. We expect State Street to post mixed results, with earnings surpassing the consensus estimates and revenues missing the mark. The custody banking giant reported better than expected results in the last quarter, with revenues increasing by 7% y-o-y to $3 billion. This was driven by a 9% y-o-y growth in fee income, followed by a 2% y-o-y increase in net interest income (NII). The fee income benefited from an increase in servicing fees and management fees, driven by higher Assets under Management & Custody (AuM/C) and rise in Assets under Management (AuM),  respectively. Similarly, growth in NII was driven by improvement in outstanding loan balances and growth in the investment portfolio and deposits, partially offset by lower investment portfolio yields. We expect the same trend to continue in the fourth quarter.

Our forecast indicates that State Street’s valuation is $110 per share, which is 6% above the current market price of close to $104. 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 of $11.7 billion in 2020 were marginally below the 2019 levels. It was due to a 14% y-o-y drop in the NII, almost offset by a 4% growth in the total fees income.

• The fees income contributes roughly 80% of the bank’s top-line. Out of which, asset servicing fees and management fees together constitute around three-fourths of the total figure. While the asset servicing fee is charged as a % of AuC/A, the management fee is charged as a % of AuM. The bank posted a 2% y-o-y and 6% rise in the asset servicing fees and management fees respectively in 2020, driven by growth in assets. The same trend continued in the first three quarters of 2021. The cumulative total fees income improved 6% y-o-y to $7.5 billion, primarily due to an 8% increase in asset servicing fees, followed by a 10% rise in management fees. This was because of growth in the asset base. While the AuC/A grew 12% to $43.34 trillion between December 2020 and September 2021, AuM increased 11% to $3.86 trillion over the same period. We expect the same momentum to continue in the fourth quarter as well.
• The bank derives close to 22% of the total revenues from NII, which decreased to 19% in 2020 due to the lower interest rate environment. The revenue stream continued to suffer in the first two quarters of 2021, before posting some improvement in the third quarter. Overall, the cumulative nine-month NII is down 16% y-o-y to $1.4 billion. We expect the fourth-quarter results to be on similar lines as Q3.
• Overall, we expect State Street’s revenues to touch $11.9 billion for FY2021.

Trefis estimates State Street’s fiscal Q4 2021 revenues to be around $2.97 billion, marginally below the $3.01 billion consensus estimate. We expect the total fees income to drive the third-quarter results.

The Federal Reserve is likely to hike interest rates in 2022. This move will benefit the NII. Further, the AuC/A & AuM are likely to maintain their growth trajectory in the subsequent quarters. Our dashboard on State Street’s revenues offers more details on the company’s operating segments along with our forecast for FY2022.

(2) EPS is likely to beat the consensus estimates

State Street Q4 2021 adjusted earnings per share (EPS) is expected to be $2.00 per Trefis analysis, almost 6% above the consensus estimate of $1.89. The bank’s adjusted net income grew 12% y-o-y to $2.26 billion in 2020, mainly due to a favorable decrease in operating expenses as a % of revenues. Further, the cumulative nine-month adjusted net income increased 9% y-o-y to $1.9 billion in 2021. We expect the same trend to drive the fourth-quarter results. Overall, State Street is likely to report an annual EPS of $7.41 for full-year 2021.

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

We arrive at State Street’s valuation, using an EPS estimate of around $7.41 and a P/E multiple of just below 15x in fiscal 2021. This translates into a price of $110, which is 6% above the current market price of around $104. 

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