Assessing Buy Opportunities in State Street (STT) and Regions Financial (RF) Prior to Earnings Releases

Last week, earnings season kicked off with several top banks reporting their fourth-quarter results. With interest rates at their highest level in 22 years, investors are closely watching the results of financial companies to figure out how they navigated the challenges posed by the high interest rates.

State Street Corporation (STT) and Regions Financial Corporation (RF) are scheduled to report their fourth-quarter results on January 19. STT is expected to report a year-over-year decline in revenue and earnings for the quarter. Similarly, RF’s revenue and EPS will likely decline over the prior-year quarter.

In this article, I have discussed why waiting for a better entry point in STT and avoiding RF could be prudent.

For the fourth quarter, STT’s EPS and revenue are expected to decline 11.6% and 6.4% year-over-year to $1.83 and $2.95 billion, respectively. However, the company has a solid earnings history, having beaten the consensus estimates in three of the trailing four quarters. Similarly, RF’s EPS and revenue for the fourth quarter are expected to decline 28.1% and 10.7% over the prior-year quarter to $0.48 and $1.80 billion, respectively.

Over the past year, the asset management industry faced pressures due to surging inflation and rising interest rates. The industry’s margins took a hit due to an inflexible cost structure amid falling revenues.

However, the asset management industry’s prospects look promising due to the rise of an aging population that’s looking for income generation and wealth creation, the growing popularity of passive funds, accumulation of savings, increase in disposable incomes, the rising prominence of emerging markets and alternative assets, and the adoption of advanced technologies such as AI, big data analytics, and machine learning.

The anticipated interest rate cuts by the Federal Reserve are expected to be advantageous for asset management firms. Falling rates would lessen the strain on different asset classes, thereby boosting returns for asset managers. Also, margin pressures on asset managers are expected to ease. Moreover, investments are expected to flow in as passive funds gain popularity and fixed-income strategies become attractive again with declining rates.

High interest rates have also been a challenge for banks since last year as they led to deposit outflows, the collapse of three regional banks, the rise in funding costs, higher deposit costs and a slowdown in loan growth.

Although interest rates are anticipated to come down this year, banks are expected to keep facing the challenges of funding cost pressures, unrealized losses, the probability of default on commercial real estate (CRE) loans, and economic uncertainty.

Moreover, key risks include the economy entering a recession with high unemployment and a deterioration of asset quality, as well as sticky inflation, which could force the central bank to keep interest rates high for longer.

Here is what investors might want to know about the featured stocks ahead of their earnings releases.

State Street Corporation (STT)

STT provides a range of financial products and services to institutional investors worldwide. The company offers investment servicing products and services, middle office products, foreign exchange, brokerage and other trading services, securities finance and enhanced custody products, deposit and short-term investment facilities, loans and lease financing, investment manager and alternative investment manager operations outsourcing, etc.

On December 5, 2023, STT announced the successful implementation of State Street Alpha, its front-to-back asset servicing platform for institutional investment and wealth managers, with BMO Global Asset Management.

State Street Canada’s President and CEO, Rob Baillie, said, “We are very pleased to have partnered with BMO GAM over the past several years and, most recently, in their successful transition onto our Alpha platform. Alpha provides our clients with fast, reliable data, analytics and real-time insights, all of which are complemented by the platform’s flexibility and open architecture – providing each of our clients with their own interoperable platform.”

STT’s total fee revenue for the third quarter ended September 30, 2023, rose 3% year-over-year to $2.36 billion. Its servicing fees rose marginally year-over-year to $1.23 billion. The company’s interest income increased 111.4% year-over-year to $2.33 billion.

On the other hand, its net interest income declined 5% over the prior-year quarter to $624 million. Its total revenue declined 9% year-over-year to $2.69 billion. The company’s net income available to common shareholders decreased 51% year-over-year to $398 million.

Also, its EPS came in at $1.25, representing a decline of 31% year-over-year. In addition, its return on average common equity came in at 7.3%, compared to 11.2% in the year-ago quarter.

Analysts expect STT’s EPS for fiscal 2023 to increase 0.6% year-over-year to $7.45. On the other hand, its revenue for the same fiscal year is expected to decline 1.2% year-over-year to $12.01 billion. The stock has gained 15.7% over the past three months and declined 8.6% over the past year to close the last trading session at $75.87.

STT’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Within the Asset Management industry, it is ranked #24 out of 50 stocks. It has a C grade for Value, Stability, and Quality. Click here to see the other ratings of STT for Growth, Momentum, and Sentiment.

Regions Financial Corporation (RF)

RF is a financial holding company that provides banking and bank-related services to individual and corporate customers. It operates through three segments: Corporate Bank, Consumer Bank and Wealth Management. It also provides investment and insurance products, low-income housing tax credit corporate fund syndication services, and other specialty financing services.

For the fiscal third quarter ended September 30, 2023, RF’s total revenue declined 5.1% sequentially to $1.86 billion. Its net interest income, on a taxable equivalent basis, decreased 6.4% sequentially to $1.30 billion. The company’s non-interest income declined 1.7% sequentially to $566 million. Also, its provision for credit loss increased 22.9% sequentially to $145 million.

Street expects RF’s EPS and revenue for the quarter ending March 31, 2024, to decline 27.1% and 10.1% year-over-year to $0.46 and $1.76 billion, respectively. Over the past year, the stock has declined 20% to close the last trading session at $17.95.

RF’s grim outlook is reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system.

It has an F grade for Sentiment and a D for Growth. It is ranked #15 out of 27 stocks in the F-rated Southeast Regional Banks industry. To see the additional ratings of RF for Value, Momentum, Stability, and Quality, click here.

What To Do Next?

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STT shares fell $0.47 (-0.62%) in premarket trading Wednesday. Year-to-date, STT has declined -2.66%, versus a -0.52% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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