What’s New With State Street’s Stock?

State Street’s stock (NYSE: STT) , a company that provides a variety of financial services to institutional investors, has fared well this year, rising by about 29% year-to-date. This compares to peer BNY Mellon’s stock (NYSE: BK) which is up about 57% over the same period. So what are some of the factors that are driving STT stock’s performance? 

The custody banking giant surpassed the street estimates in the third quarter of 2024. Earnings stood at $2.26 per share, while revenue for the quarter grew by about 22% year-over-year to $3.26 billion. Fee revenues rose 16% year-over-year to $2.62 billion. The company’s average assets under management increased by 29% year-over-year to $4.73 trillion led by higher market levels at the end of the quarter and record quarterly net inflows. Assets under custody also surged by 17% to $46.7 trillion. The company also saw its net interest income rise by 16%, driven by higher investment securities yields and loan growth,  although a shift in the deposit mix partly offset this. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

State Street’s margins have also been picking up. Pre-tax margins rose to 28.4%, up almost 940 basis points compared to last year. Custody banks also benefit to an extent from operating leverage due to their relatively high fixed-cost structure, with revenues growing at a quicker pace compared to total costs over the last quarter.  Moreover, the company has been streamlining its operations to cut costs while focusing on higher-margin businesses.

Now, the increase in STT stock over the last four years has been far from consistent and has largely been as volatile as the S&P 500. Returns for the stock were 31% in 2021, 14% in 2022, and 4% in 2023.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could STT face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The markets have generally been bullish post the U.S. election, with Donald Trump set to assume the presidency for a second term.  Investors are betting that the Trump administration’s focus on deregulation could translate into a more lenient approach to financial oversight than the Biden administration. This could help banks such as STT by lowering compliance costs which could boost profitability. Moreover, higher potential economic growth should bode well for asset prices, helping custody banks like State Street.  Trump has also favors tax cuts, which could also help the bottom lines of banks. Separately, the end of quantitative tightening by the U.S. Fed also helps STT, as liquidity in the system could improve with institutions having more funds to park with custody banks. At the same time, asset prices and investing activity could also pick up as interest rates ease. We value STT stock at about $90 per share, which is slightly below the current market price. See our analysis of  State Street’s valuation for more details.

[1] Returns as of 12/13/2024
[2] Cumulative total returns since the end of 2016

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