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State Street Leads Banks Down on 'Tepid' Outlook

NEW YORK (TheStreet) -- State Street (STT - Get Report) was the loser on a rough Thursday day for the banking sector and the broad market, with shares sliding 2.5% to close at $64.48.

The Dow Jones Industrial Average (^DJI) was down 1.4%, while the S&P 500 (^GSPC) pulled back 1.2% and the NASDAQ Composite (^IXIC) ended 1.5% lower, as investors reacted to a mixed batch of economic reports.

The Department of Commerce said retail sales in the United States increased 0.3% during February from January, and were up 1.5% from a year earlier. The sequential growth number came in slightly ahead of the consensus estimate of 0.2% among economists polled by Thomson Reuters.

The Department of Labor said initial unemployment claims for the week ended March 8 declined by 9,000 to 315,000, which was better than the expected 330,000 new claims. The four-week moving average declined by 6,250 to 330,500.

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Goldman Sachs cut its first-quarter GDP estimate for the United States by two-tenths to 1.5%. "Although February retail sales rose a bit more than expected, negative back revisions more than offset the front-month surprise," Chief Economist Jan Hatzius wrote in a note to clients.

The recent pattern of lackluster data out of China continued, with industrial output during January and February was up 8.6% from a year earlier, however, that was the slowest growth rate since April 2009.

The KBW Bank Index (I:BKX) was down 0.8% to 69.93, with all 24 component stocks ending with declines.

State Street

Shares of State Street of Boston are down 14% this year, following a 59% return during 2013. The shares trade for 11.3 times the consensus 2015 earnings estimate of $5.69 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $5.00.

Based on a quarterly payout of 26 cents, the shares have a dividend yield of 1.61%.

JPMorgan analyst Vivek Juneja has a neutral rating on State Street and on Wednesday cut his 2014 EPS estimate for the bank to $4.98 from $5.20, and his 2015 EPS estimate to $5.63 from $5.88.

The analyst in a note to clients called the near-term outlook for large trust banks "tepid," with revenue pressure from a recent decline in foreign exchange volatility, weak stock and bond markets and a continuing decline in net interest margins, with short-term rates remaining near zero.

"Earnings are also pressured by continued high expenses at all Trust banks led by high regulatory costs. Pricing pressures continue in asset servicing business, and asset management has been impacted by continued shift to indexed type assets," Juneja wrote.

This chart shows the performance of State Street's stock since the end of 2011 against the KBW Bank Index and the S&P 500:

STT Chart data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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