State Street Corporation (STT) is scheduled to release fourth-quarter and full-year 2014 results on Jan 23, before the market opens.
Last quarter, the company delivered a positive earnings surprise of 10.7%, triggered by higher net interest income and a rise in fee income, which were, however, partially offset by higher operating expenses.
State Street recorded an earnings beat in two of the trailing four quarters with an average positive surprise of 4.2%.
Will State Street be able to beat earnings estimates this time too or will it disappoint? Let us see how things have developed for this announcement.
Factors Influencing Q4 Results
State Street has been witnessing steady improvement in revenues over the past few years with a similar trend continuing in the first nine months of 2014 as well. However, sluggish growth in net interest revenue (NIR) owing to margin compression, an anticipated flat yield curve and unchanged prepayment fees have kept the top line slightly pressurized.
In the upcoming release, management expects NIR to decline sequentially driven by the impact of lower market interest rates and increasing high quality liquid assets (HQLA) to comply with liquidity requirements. Further, based on the current assessment of market conditions, NIR on an operating basis is anticipated to be at the higher end of the $2.25–$2.28 billion range in 2014, assuming that the client deposits and market interest rates continued at the second-quarter levels throughout the quarter.
Further, management predicts revenues to increase in the range of 3%–5% in 2014, on the assumptions of a modest rise in interest rates and an improvement in its securities lending business and stable equity markets. However, we believe revenues will remain strained as a result of fee waivers and a persistent low interest rate scenario.
The bank has been witnessing an increasing trend in expenses for several years despite its cost saving initiatives. This inclination is expected to continue in this quarter as well. Management anticipates operating expenses to go up in the range of $10–$15 million sequentially, taking into account the rising regulatory costs. However, the impact of elevated expenses is anticipated to be partially offset by other savings.
Further, management remains on track to generate an incremental $130 million in total pre-tax expense savings in 2014 from the Business Operations and IT Transformation program along with the pre-set target to lower pre-tax expenses from operations in the range of $575–$625 million by the end of 2014.
Moreover, the company was able to impress analysts with its level of activities during the quarter. As a result, the Zacks Consensus Estimate for the quarter increased marginally to $1.25 per share over the last 7 days.
Earnings Whispers
Our proven model does not conclusively show that State Street is likely to beat the Zacks Consensus Estimate in the fourth quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for State Street is 0.00%. This is because the Most Accurate estimate of $1.25 is at par with the Zacks Consensus Estimate.
Zacks Rank: State Street’s Zacks Rank #3 however increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings surprise call.
Stocks to Consider
Here are a few finance stocks you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
The Earnings ESP for The Chubb Corporation (CB) is +1.39% and it has a Zacks Rank #1. The company is slated to report on Jan 29.
CIT Group Inc. (CIT) has an Earnings ESP of +5.38% and holds a Zacks Rank #1. It is scheduled to report on Jan 27.
The Allstate Corporation (ALL) has an Earnings ESP of +3.05% and it carries a Zacks Rank #1. The company is slated to release results on Feb 4.
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