State Street Earnings: Decent Quarter but Our Long-Term View Intact

Wide-moat State Street STT 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.

Net interest income was down 10% sequentially with net interest margin of 1.12% coming in a bit below our 1.13% expectation and down from 1.19% in the second quarter. Deposits continue to shift toward interest-bearing. Average deposits were down 4% from the second quarter with noninterest-bearing deposits down 10%. As interest rates continue to rise, we expect further shifts toward interest-bearing deposits. State Street expects fourth-quarter net interest income to be in the middle of a $550-$600 range, which puts the firm’s 2023 expected net interest income outlook slightly below our forecast.

Fee revenue growth continues to be lackluster. Servicing fees were flat from the year-ago period on a constant currency basis as market appreciation and new business are largely offset by lower client activity and pricing headwinds. Investment management fees grew 4% sequentially driven by markets, but we note that average market levels are likely to be lower in the fourth quarter.