State Street Stock To Top The Consensus In Q2?

State Street (NYSE: STT) is scheduled to report its fiscal Q2 2022 results on Friday, July 15, 2022. We expect State Street to top the consensus estimates of revenues and earnings. The custody banking giant reported better than expected results in the last quarter, with revenues increasing by 4% y-o-y to $3.1 billion. It was driven by a 9% y-o-y growth in net interest income (NII), followed by a 4% y-o-y increase in total fee income. That said, the Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) decreased by 4% and 3%, respectively, on a sequential basis. We expect the total assets to see some improvement in the second quarter. Further, the net interest income is likely to benefit from some recovery in the interest rates. 

Our forecast indicates that State Street’s valuation is $94 per share, which is 50% above the current market price of just above $63. 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 $12 billion in 2021 were 2% above the 2020 levels. It was due to a 5% y-o-y increase in total fee income, partially offset by a 13% drop in NII.

• The bank is heavily dependent on fee income, which contributes more than 80% of the total revenues. Further, around three-fourths of this income is derived from servicing fees and management fees, which are charged as a % of AuC/A & AuM, respectively. Hence, changes in AuC/A & AuM have a direct impact on the top line. While the assets saw a sequential decrease in the first quarter of 2022, we expect it to improve in the second quarter.
• The NII suffered a 13% drop in 2021 due to a lower interest rate environment. However, it increased 9% y-o-y in Q1 2022, primarily due to higher interest-earning assets and improvement in the net interest margin. We expect it to further improve in the second quarter.
• Overall, we forecast State Street’s revenues to touch $12.8 billion for FY2022.

Trefis estimates State Street’s fiscal Q2 2022 revenues to be around $3.09 billion, 3% above the $3.01 billion consensus estimate. Moving forward, we anticipate the net interest income to grow driven by higher interest rates. Notably, the Federal Reserve has already hiked the benchmark interest rates thrice in 2022, with further rate hikes to follow. 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 Q2 2022 adjusted earnings per share (EPS) is expected to be $1.94 per Trefis analysis, almost 5% above the consensus estimate of $1.85. The bank’s adjusted net income grew 14% y-o-y to $2.6 billion in 2021, mainly due to a favorable decrease in provisions for credit losses and higher revenues. Further, the adjusted net income increased 19% y-o-y to $583 million in the first quarter of 2022. It was partly due to the growth in the top line and partly due to lower expenses as a % of revenues. We expect the same trend to drive the second-quarter results. Overall, State Street is likely to report an annual EPS of $7.48 for the full year of 2022.

(3) Stock price estimate 50% higher than the current market price

We arrive at State Street’s valuation, using an EPS estimate of around $7.48 and a P/E multiple of just below 13x in fiscal 2022. This translates into a price of $94, which is 50% above the current market price of around $63. 

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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