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State Street (STT) Q1 Earnings Top Estimates, Revenues Dip

An increase in securities finance revenue led State Street Corporation’s STT first-quarter 2016 operating earnings of 98 cents per share, which outpaced the Zacks Consensus Estimate of 88 cents. However, the reported figure was down 16% year over year.

 


Better-than-expected results were driven by relatively stable expenses and improved securities finance revenue, partly offset by a decline in net interest revenue. A strengthening U.S. dollar and the challenging market environment adversely impacted operating revenues. Also, growth in assets remained under strain.

After considering certain non-recurring items, net income available to common shareholders came in at $319 million or 79 cents per share compared with $373 million or 89 cents per share in the year-ago quarter.

Performance in Detail

Revenues, on a GAAP basis, totaled $2.48 billion, down 5% year over year. Further, the top line came in lower than the Zacks Consensus Estimate of $2.56 billion.

Net interest revenue, on an operating basis, fell 5% from the year-ago quarter to $539 million. The decline was mainly due to the success in reducing the size of the balance sheet in 2015, partially offset by higher U.S. market interest rates.

However, net interest margin increased 11 basis points year over year to 1.12%.

Fee revenues came in at $2.03 billion, down 4% from the prior-year quarter. All components of fee income showed weakness except securities finance revenue as well as processing fees and other revenue.

On an operating basis, non-interest expenses were $1.94 billion, relatively stable on a year-over-year basis. Increase in compensation and employee benefits costs, information systems and communications expenses and transaction processing services costs was offset by lower other expenses.

As of Mar 31, 2016, total assets under custody and administration were $29.9 trillion, down 5% year over year. Moreover, assets under management were $2.3 trillion, down 6% year over year.

Capital and Profitability Ratios

State Street’s capital and profitability ratios displayed strength in the quarter. Under Basel III (Advanced approach), the estimated Tier 1 common ratio was 12.3% as of Mar 31, 2016.

Return on common equity (on an operating basis) came in at 8.4% compared with 10.4% in the year-ago quarter.

Share Repurchases

During the reported quarter, State Street repurchased shares worth $325 million at an average price of $57.88 per share. This was part of the company’s buyback plan, which authorized the purchase of up to $1.8 billion of stock through the second quarter of 2016.

Our Viewpoint

We expect State Street’s restructuring programs, along with stable core servicing and investment management franchises, to help offset its top-line weakness. Moreover, enhanced capital deployment initiatives will reinforce the company’s priority commitment to enhance its shareholders’ value.

However, a low interest rate environment and a persistent fall in net interest revenue are expected to remain a drag on State Street’s top line in the quarters ahead.

Currently, State Street carries a Zacks Rank #3 (Hold).

Performance of Other Major Regional Banks

A substantial rise in interest income drove BB&T Corporation’s BBT first-quarter 2016 adjusted earnings of 69 cents per share. An improved top line led to the better-than-expected results. However, higher operating expenses and a drastic rise in provision for loan losses due to a stressed energy sector exposure were the headwinds.

The Bank of New York Mellon Corp. BK reported first-quarter 2016 adjusted earnings per share of 74 cents, which outpaced the Zacks Consensus Estimate of 68 cents. Better-than-expected results were driven by lower expenses, partly offset by a slight fall in revenues and higher provision for loan losses.

Higher provisions led KeyCorp.’s KEY first-quarter 2016 adjusted earnings from continuing operations of 24 cents per share to miss the Zacks Consensus Estimate by a penny. Results were adversely impacted by a significant rise in provision for loan losses, higher operating expenses and a decline in non-interest income, partially offset by an increase in net interest income.

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