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Stock Analyst Update

State Street Poised For a Strong 2018

While we expect fee growth to moderate over the longer term, the wide-moat firm should hit a return on equity just over 16% longer term, post tax reform.

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Wide-moat-rated  State Street (STT) reported solid fourth-quarter results, and we are increasing our fair value estimate to $107 per share from $100. The tailwind of higher global markets, along with new business wins, continued to spur growth in assets under management and assets under custody for State Street, with year-over-year growth of 13% and 15%, respectively. While markets don’t usually go up forever, 2018 appears poised to be another strong year for market, and by extension, State Street. We were impressed with the cost savings, fee revenue growth, and the overall operating leverage State Street generated this year. The firm is already creeping toward the high end of its long-term return on equity goal, and we project that there are more gains to be had. While we expect fee growth will have to moderate somewhat over the longer term, we still expect the bank to hit a return on equity just over 16% longer term, post tax reform. The one item we are cautious on is that this bull market is long in the tooth, and while we can’t predict when it will end, we do know that once asset levels finally begin to decline, the earnings growth of firms like State Street will have to slowdown.

ETF growth was a strong contributor to growth in assets under management, and management stated that roughly $5 billion in inflows occurred for their new low-cost ETF line up. While we don’t expect institutional clients to necessarily flock to these new ETFs, away from the pre-existing Spyder ETFs which may cost more but have more lilquidity, we do expect the offering to have an improved draw for retail clients. Related to this, State Street’s partnering with TD Ameritrade as a platform for these ETFs shows the bank’s commitment to trying to maintain better share within the space. We expect this should lead to decreased asset yields overall as State Street has finally truly entered into the fee war battle, but the resulting growth should be a net positive for the firm.

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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.