State Street posted better than expected set of Q3 results with earnings coming in at $2.26 per share, while revenue for the quarter came in at $3.26 billion led by fee growth as well as higher net interest income.
The company posted revenues of $12.15 billion and $12.03 billion in FY2021 and FY2022 respectively. However, revenues decreased to $11.94 billion in FY2023.
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:
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 entails global custody, fund services, liquidity services, and securities lending. The company earns a fee from its customers, generally a small percentage of total assets under custody.
State Street's Investment Management business includes advisory services, investment research, and management of assets such as equity and fixed-income securities, ETFs and cash, and money market instruments.
State Street's main competitors include Bank of New York Mellon, JPMorgan Chase, Citigroup, BlackRock, and Vanguard.
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.
State Street is a leading custodian of assets with assets under custody and administration in excess of $38 trillion. It manages assets worth almost $3.5 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.
Global assets under management (AuM) are expected to continue to grow steady over the coming years. As economic conditions improve, we expect fund inflows to increase. Additionally, growing wealth in emerging markets like Asia-Pacific and Middle East & Africa regions will likely result in additional demand for asset management services (and as a result, asset servicing).
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.
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.
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.
