Analysts at UBS have downgraded their rating on State Street Corporation (NYSE:STT) from ‘Buy’ to ‘Neutral’ following the bank’s 2Q earnings report as it once again faces pricing pressure.
The analysts also lowered their 12-month price target on the stock from $90 to $72 based on a roughly nine times multiple of their 2024 earnings per share estimate.
State Street shares traded at US$66.76 on Monday afternoon.
The analysts wrote in a note to clients that they now expect State Street to deliver earnings per share (EPS) of $7.55 in 2023, down $0.60 or 7% from their previous estimate, and EPS of $8 in 2024, down $1.40 or 15%.
They pointed out that State Street was experiencing “pricing pressure déjà vu.”
“This situation reminds us of the pricing pressure of five years ago and may be driven by the expense pressure faced by their core active traditional asset manager customer base (i.e. durable),” the analysts wrote.
“During STT's previous struggle with these issues, its multiple experienced a compression of over six turns, resulting in underperformance compared to peers by 31% between 1Q 2018 and 2Q 2019. While Friday's drop of 12% begins to reflect this risk, we see substantial risk that STT’s multiple will remain low (currently at roughly 8.5 times for the next 12 months).”
Investors are concerned about the combination of pressure on net interest income (NII) and fee revenue risk, analysts opined.
They wrote that, while management has indicated that pricing discussions have resulted in plans to generate alternative revenues, it remains uncertain how effectively State Street can capture those opportunities.
“From our perspective, the ability to achieve better revenue outcomes has become a ‘show me’ story, and considering previous periods of pricing pressure, we anticipate headwinds to persist in the foreseeable future,” they noted.
The UBS analysts concluded: “Given the uncertain outlook, pressure on interest income and fee rate we believe operating leverage will become more challenging, therefore we are moving to ‘Neutral’ on STT.”
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