Company Reports

State Street is off to a decent start to 2024. First-quarter revenue of $3.14 billion and adjusted EPS of $1.69 edged out the respective FactSet consensus estimates of $3.06 billion and $1.49. Net interest income, which tends to be more volatile than fee revenue, was the driver of the beat. State Street did tweak its outlook higher, but our model was above the firm’s prior outlook. Overall, we will maintain our wide moat rating and fair value estimate of $74 and regard shares as being roughly fairly valued.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did moderate to about a 2% headwind in 2020, 2021, and 2022. The rapid rise in interest rates during 2022 helped the custody banks expand their net interest income but in 2024 higher funding costs are proving to be a headwind. While net interest income may only make up about 20%-25% of State Street's revenue, there is little incremental operating cost to this revenue and thus net interest income is an important profitability driver.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did moderate to about a 2% headwind in 2020, 2021, and 2022. The rapid rise in interest rates during 2022 helped the custody banks expand their net interest income but in 2024 higher funding costs are proving to be a headwind. While net interest income may only make up about 20%-25% of State Street's revenue, there is little incremental operating cost to this revenue and thus net interest income is an important profitability driver.

State Street ended the year on a high note with revenue and adjusted EPS topping the FactSet consensus estimates by 3% and 11%, respectively. We attribute the firm’s revenue beat to better-than-expected net interest income and note that the firm’s net interest income outlook for 2024 was better than our model. Relative to fee income, net interest income tends to be much more volatile and difficult to predict. As we update our model, we expect to increase our fair value estimate by a single-digit percentage.

Wide-moat State Street reported a decent third quarter. Revenue, excluding the firm’s securities repositioning, was $2.98 billion and adjusted EPS was $1.93, which beat the respective FactSet consensus estimates of $2.92 billion and $1.79. Overall, there was little in the firm’s earning release that would alter our long-term view of the firm. We will maintain our fair value estimate of $68 on State Street’s shares and continue to prefer peer BNY Mellon over State Street. State Street’s clients tend to be sophisticated and its asset manager customers continue to consolidate and face fee pressure, which, in our view, limits the firm’s profitability.

The custody banks have gotten visibly cheaper in recent years, but we think investors need to be discerning. At the onset of COVID-19, lower interest rates weighed heavily on the banks' net interest income, or NII, and resulted in hefty money market fee waivers. However, higher interest rates were not the panacea many investors hoped for. The custody banks' asset-manager and asset-owner clients tend to be sophisticated, a fact that State Street mentioned multiple times on its most recent earnings call. While money market fee waivers have been eliminated, deposit betas over 100% for State Street and BNY Mellon have meant that these firms have had to rapidly increase the interest they pay on the deposits of these sophisticated clients. In addition, the inflationary environment has had a negative impact on expense growth, particularly at Northern Trust.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did moderate to about a 2% headwind in 2020, 2021, and 2022. The rapid rise in interest rates during 2022 helped the custody banks expand their net interest income but in 2023 higher funding costs are proving to be a headwind. While net interest income may only make up about 20%-25% of State Street's revenue, there is little incremental operating cost to this revenue and thus net interest income is an important profitability driver.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did moderate to about a 2% headwind in 2020, 2021, and 2022. The rapid rise in interest rates during 2022 helped the custody banks expand their net interest income but in 2023 higher funding costs are proving to be a headwind. While net interest income may only make up about 20%-25% of State Street's revenue, there is little incremental operating cost to this revenue and thus net interest income is an important profitability driver.

Wide moat-rated State Street reported an OK second quarter, with revenue of $3.11 billion and adjusted EPS of $2.17 compared with the FactSet consensus of $3.14 billion and $2.10 respectively. Net interest income was down 10% sequentially, which was on the low end of the firm's 5%-10% outlook. The culprit was primarily higher funding costs on deposits, though average deposits also declined 1% sequentially. These trends show no signs of slowing down and, as a result, State Street expects net interest income to decline 12%-18% sequentially in the third quarter and then another sequential decline of 2%-6% in the fourth quarter.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Wide-moat-rated State Street reported an uninspiring quarter with revenue of $3.10 billion and adjusted EPS of $1.52 falling short of the FactSet consensus estimates of $3.12 billion and $1.64, respectively. Net interest income of $766 million was down 3% sequentially, which was worse than flat guidance as deposits, particularly non-interest-bearing deposits, declined. State Street’s asset manager and asset owner base are sophisticated, and we view State Street’s challenges monetizing deposits as a form of pricing pressure and our rationale for a negative moat trend rating. We view this quarter as a reminder that deposit trends, particularly for non-interest-bearing deposits, can be choppy for the custody banks. As we trim our net interest income forecasts, we are reducing our fair value estimate on State Street’s shares to $80 from $90.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did moderate to about a 2% headwind in 2020 and 2021. The rapid rise in interest rates during 2022 helped the custody banks expand their net interest income. While net interest income may only make up one quarter of State Street's revenue, there is little incremental operating cost to this revenue and thus net interest income is an important profitability driver.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did moderate to about a 2% headwind in 2020 and 2021. The rapid rise in interest rates during 2022 helped the custody banks expand their net interest income. While net interest income may only make up one quarter of State Street's revenue, there is little incremental operating cost to this revenue and thus net interest income is an important profitability driver.

State Street ended 2022 with a healthy fourth quarter. Revenue of $3.16 billion and adjusted EPS of $2.07 beat the FactSet consensus estimates of $3.04 billion and $1.98, respectively. The firm’s sales wins, software business, expense control, and balance sheet are encouraging; however, lower market levels and the lack of meaningful net flows in the asset management business are weighing on the firm. Overall, we will maintain our wide moat rating and $90 fair value estimate on State Street’s shares.

State Street announced on Nov. 30 that it has terminated its proposed acquisition of Brown Brothers Harriman and Company. While we believe the deal had strategic merit as there are few custody players left that could be acquired, we think walking away is the right move for a number of reasons. Firstly, the deal ran into substantial regulatory hurdles and even if State Street had prevailed, the process would have cost its management time, uncertainty, and the potential for ill will with government regulators around the world. Secondly, market values have fallen, which weighed on Brown Brothers' asset-based fees. Thirdly, with lower potential accretion from the deal than initially anticipated, State Street may be better off buying back shares. Finally, as the deal was more than one year from announcement, either party could walk away without penalty. We will maintain our wide-moat rating and $90 fair value estimate on State Street's shares.

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industrywide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did appear to moderate to about 2.5% in 2020. In addition, low interest rates continue to pressure net interest income, but this is showing signs of moderating. Following its announced acquisition of Brown Brothers Harriman, which is expected to close in the third quarter of 2022, State Street will be the largest custodian by assets under custody. Given pressures in the industry, we expect management to continue to focus on managing expenses.

State Street reported a decent third quarter with results mostly in line with expectations. Revenue of $2.99 billion and adjusted EPS of $1.82 came in just a bit above the FactSet consensus of $2.97 billion and $1.78, respectively. As expected, rising interest rates are helping the firm's net interest income, while falling asset values are weighing on asset-based fees. State Street is also resuming share repurchases and expects to buy back $1 billion of its shares in the fourth quarter. We will maintain our wide moat rating and fair value estimate of $92 per share.

Many investment service firms (wealth managers, retail brokerages, custody banks, and asset managers) have material exposure to interest rates. Clients at wealth management firms and retail brokerages typically have 5%-20% of their account balance in cash that the financial institution sweeps into a bank subsidiary. The deposits are then used to make loans or invest in fixed-income securities. They may also earn asset management or distribution fees on client assets in money market funds.

Wide-moat State Street reported decent second-quarter financial results, with revenue of $3.03 billion and adjusted earnings per share of $1.97 edging out the FactSet consensus of $2.99 billion and $1.81, respectively. Rising interest rates are benefiting net interest income, which management now expects to grow 24%-27% in 2022, up from the previous outlook of 18%-20%. That said, declining market levels will weigh on the firm’s servicing fees and investment-management fees. We will maintain our fair value estimate of $92 per share.

We went into this year’s Federal Reserve bank stress tests expecting a bit more pressure on stress capital buffers as multiple banks had warned in the preceding quarter that their SCB was likely to increase. This is indeed what played out, as we estimate that roughly seven of the 20 U.S. banks we cover that participated this year are likely to see a higher SCB once the assigned SCBs become official. It appears that JPMorgan, Bank of America, and Citigroup are all likely to see increases to their SCBs of close to 1% each. The biggest increase seems likely to come from M&T Bank, which we expect to increase close to 2.2%, going from 2.5% to roughly 4.7%. Meanwhile, we expect the SCB for 11 of the 20 U.S. banks we cover to remain stable, including for Wells Fargo, which had previously warned that their SCB could go up, so this is a slight positive surprise for the bank in our view. Finally, we think Goldman Sachs could see a slight decrease to its current SCB of 6.2%, potentially declining to 6%, while Discover could see a more material decline, going from 3.6% to 2.5%.