State Street: Financial Loser

NEW YORK ( TheStreet) -- State Street ( STT) was the loser among large U.S. banks on Wednesday, with shares pulling back 2% to close at $69.67.

The broad indices ended mixed, despite upbeat earnings reports from Apple ( AAPL), Ford ( F) and Boeing ( BA).

Economic reports struck a mostly positive tone, with the Census Bureau estimating that the seasonally adjusted annual pace for sales of new homes in the U.S. rose to 497,000 during June, which was its highest level since July 2008. The rate of home sales was up over 8% from a downwardly revised 459,000 in May, and rose 38% from a year earlier.

Financial information provider Markit said its "flash" Purchasing Managers Index (PMI) indicated that manufacturing in the U.S. had hit a four-month high during July, with the PMI rising to 53.2 from 51.9 in June. A reading higher than 50 indicates economic expansion.

Markit said its Eurozone manufacturing flash PMI rose to an 18-month high of 50.1, showing a return to expansion as it rose from 48.8 in June.

The encouraging figures for the U.S. and Europe seemed to overshadow a decline in the flash PMI for China, to an 11-month low of 47.7 in July from 48.2 in June.

The KBW Bank Index ( I:BKX) was down 0.5% to close at 66.38, with all but seven of the 24 index components down for the session. The index has returned 29% this year, following a 30% return during 2012.

In his second-quarter summary for large-cap bank earnings results, Deutsche Bank analyst Matt O'Connor late on Monday wrote that the rise in interest rates late in the second quarter didn't have a meaningful effect on big banks' net interest income, and that "while there will be some benefit over time it's likely to be modest."

"Part of this reflects banks' decision to reduce exposure to long-dated assets -- such as those with mortgages as the underlying collateral -- given these assets already represent a high 43% of deposits for banks," O'Connor wrote. While the asset shift will have some benefit to banks' net interest margins (NIM), "it's largely offset with a smaller balance sheet."

"In short, large banks (incl. asset sensitive banks) need a parallel shift in rates (preferably, slow and steady with no meaningful change in deposits) for NIMs to rise meaningfully," according to O'Connor.

The "parallel" shift in rates could take quite some time to develop. Federal Reserve chairman Ben Bernanke's recent comments have indicated the central bank may curtail its purchases of long-term bonds as early as September, which would presumably push long-term rates higher. However, statements from the Federal Open Market Committee have been much more forceful in making the case for a continued "highly accommodative" monetary policy for short-term rates, at least until the U.S. unemployment rate moves below 6.5%.

The unemployment rate in May was 7.6%. The federal funds rate has been in a range of zero to 0.25% since late 2008.

State Street

State Street of Boston on Friday reported second-quarter net income available to common shareholders of $571 million, or $1.24 a share, increasing from $455 million, or 98 cents a share, in the first quarter, and $480 million, or 98 cents a share, during the second quarter of 2012.

The custody bank's second-quarter operating revenue totaled $2.580 billion, increasing from $2.470 billion the previous quarter and $2.459 billion a year earlier.

Please see TheStreet's earnings coverage for full details of State Street's operating results.

Jefferies Analyst Ken Usdin rates State Street a "buy," with a $74 price target, and on Monday raised his 2014 earnings estimate for the company by a nickel to $5.30, "given a better expense trajectory, which more than offsets a lower-than-modeled base for servicing fees."

"Near-term, we see 3Q EPS holding-in around ~$1.20/share, as core business growth and efficiency initiative benefits are offset by seasonal declines in foreign exchange and securities lending and weaker net interest income ," Usdin wrote, adding that "despite the tepid revenue environment, the path to 2014 consensus remains achievable with capital return and efficiency initiatives doing most of the heavy lifting."

State Street's shares trade for 13.3 times the consensus 2014 earnings estimate of $5.25 a share, among analysts polled by Thomson Reuters.

STT Chart STT data by YCharts

Interested in more on State Street? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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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