VALUATION HIGHLIGHTS
- Investment Services (Asset Servicing, Forex & Other Trading, Securities Finance & Other) constitute 77% of the Trefis price estimate for State Street's stock.
- Investment Management constitutes 23% of the Trefis price estimate for State Street's stock.
WHAT HAS CHANGED?
Latest Earnings
State Street posted better-than-expected Q4 results, with earnings coming in at $2.46 per share. Growth was driven by notable increases in fee revenues and net interest income. Revenue increased by 12% year-over-year, with fee revenue up by 13% and net interest income rising by 10%.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of State Street's value that present opportunities for upside or downside to the current Trefis price estimate for State Street:
- Servicing & Administration Fee as % of Assets under Custody: State Street is highly sensitive to this driver because asset custody is the firm's primary business and the fact that it has over $45 trillion in assets under custody. Fees have been declining as a percentage of assets due to competition and economic conditions. We expect fees to remain around 0.010% of assets over our forecast period. However, if the company is forced to cut fees in response to increasing competition from local players, and the figure falls to 0.008% over the same period, it would present a downside of about 5% to the Trefis price estimate.
- State Street's Assets Under Custody and Administration: We currently forecast State Street's assets under custody to increase from $44 trillion in 2024 to over $54 trillion by the end of the Trefis forecast period. However, a faster-than-expected increase in custody mandates, coupled with a strong appreciation in the market value of custody assets, could boost this figure to $60 trillion by the end of our forecast period. In that case, there would be an upside of about 7% to the Trefis price estimate.
BUSINESS SUMMARY
State Street provides investment servicing and investment management services to institutional investors such as mutual funds, corporate and public retirement plans, insurance companies, and endowments.
State Street's primary business is Investment Servicing, which includes global custody, fund services, liquidity services, and securities lending. The company earns fees from its customers, typically a small percentage of total assets under custody.
State Street's Investment Management business, operated through State Street Global Advisors (SSGA), includes advisory services, investment research, and asset management across equity and fixed-income securities, ETFs, cash, and money market instruments.
State Street's main competitors include Bank of New York Mellon, JPMorgan Chase, and Citigroup in investment servicing. In the asset management space, it competes with firms such as BlackRock and Vanguard.
SOURCES OF VALUE
Complementary Investment Servicing and Investment Management businesses allow competitive fees
Since State Street has an in-house investment servicing business, it can offer investment management services at lower advisory fees. Most asset managers have to outsource trading and execution functions to other custody banks. They are forced to charge higher fees to compensate for the costs associated with custody, trading, and executing transactions. Additionally, State Street's Investment Servicing business helps it attract institutional clients, to whom it can provide advisory services in addition to the custody of financial securities.
Size and scale of operations
State Street is a leading custodian of assets with assets under custody and administration in excess of $45 trillion. It manages assets worth almost $4.7 trillion and is present in over 100 markets across 29 countries. State Street benefits from economies of scale, which enable it to dilute operating costs (those associated with people and technology setup) over a larger asset pool and investor base, thereby improving operating margins.
KEY TRENDS
Worldwide growth in demand for asset management services
Global assets under management (AuM) are expected to continue to grow steadily over the coming years. As economic conditions improve, we expect fund inflows to increase. Additionally, growing wealth in emerging markets like the Asia-Pacific and Middle East & Africa regions will likely result in additional demand for asset management services (and as a result, asset servicing).
Increase in cross-border investments and complex assets
Investors increasingly invest in cross-border assets, in emerging markets, and in more complex (structured) financial instruments. These generally require the presence of large global custodians and not local/regional players or financial service providers' in-house investment servicing teams. Larger custodians like State Street and BNY Mellon will benefit greatly from this trend.
Growth in mutual funds and private pension plan providers
In many countries across the globe and mainly in emerging economies, the state is withdrawing from its role as a primary pension provider, which is causing people to invest in defined-contribution pension plans and mutual funds. Since custody providers serve institutional investors such as mutual and pension funds, custodians exhibit promising growth prospects in terms of the size of Assets under Custody.
Changes in asset management fee structure
The recent financial crisis has resulted in more transparency in the pricing of asset management services. As a result, we expect performance fees (which look at longer investment horizons than before) to increase as a percentage of fees as opposed to management fees, which are simply charged as a percentage of AuM.
