Choppy Deposit Trends Lower Visibility on State Street's Net Interest Income
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.