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State Street (STT) Rides on Expansion Efforts Despite Cost Woes
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State Street (STT - Free Report) is poised for growth on the back of business servicing wins, synergies from strategic buyouts, a global footprint and high interest rates. However, persistently elevated expenses and a challenging operating backdrop that is likely to hamper fee income growth are major headwinds.
State Street has witnessed a decent increase in net interest revenues (NIR) and net interest margin (NIM) on the back of higher interest rates. NIR recorded a three-year (ended 2023) compound annual growth rate (CAGR) of 7.8%. Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022, 0.74% in 2021 and 0.97% in 2020.
Though rising funding costs and shrinking non-interest-bearing deposit balance weighed on both NIR and NIM during the first quarter of 2024, high interest rates for a longer period are likely to offer support to both metrics. While we project NIR to decline 4.9% in both 2024 and 2025, the metric will rebound and grow at the rate of 3.9% in 2026.
State Street is continuing with its efforts to strengthen fee income sources. While the company’s total fee revenues declined in 2022 and 2023, the same saw a four-year (2019-2023) CAGR of 1%. This was mainly driven by an increase in client activity and significant market volatility. Even in the first quarter of 2024, the upward momentum continued. Further, servicing assets yet to be installed going forward were $2.3 trillion in 2023 across client segments and regions.
STT remains well-positioned with respect to fundamental business activities, given its global exposure and a broad array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, along with business servicing wins and inorganic growth strategy, are expected to keep supporting fee revenues. We anticipate total fee revenues to witness a CAGR of 3.3% by 2026.
State Street has been expanding its scale by undertaking strategic acquisitions and restructuring efforts. This February, it acquired CF Global Trading, which will further boost its outsourced trading capabilities. Also, as part of the consolidation of its India-based operations, the company has assumed full ownership of its two joint ventures. These are part of STT’s ongoing initiatives to optimize its global operations. The deals, along with past buyouts, are expected to result in revenue and cost synergies, helping the company expand its footprint across the globe.
However, mounting operating expenses are expected to hurt State Street’s bottom line. The total non-interest expenses witnessed a three-year CAGR of 3.2% (ended 2023), with uptrend continuing in the first quarter of 2024. Overall expenses are expected to remain elevated due to higher information systems and communications expenses. Further, inflationary pressure and the company’s strategic buyouts and investments in franchises will put pressure on the expenses. Our estimates for total non-interest expenses imply a CAGR of 1.3% by 2026.
State Street’s largest source of revenues is fee income, which constituted almost 77% of total revenues in the first quarter of 2024. Concentration risk arising from higher dependence on fee-based revenues could significantly alter the company’s financial position if there is any change in individual investment preferences, regulatory amendments or a slowdown in capital market activities.
Shares of this Zacks Rank #3 (Hold) company have lost 1.2% over the past three months against the industry’s rally of 3.1%.
Image Source: Zacks Investment Research
Banks Worth a Look
A couple of better-ranked major bank stocks are Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) .
Estimates for Bank of America’s earnings for 2024 have moved marginally north in the past 30 days. The company’s shares have risen 16.8% over the past six months. At present, BAC carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Estimates for Wells Fargo’s 2024 earnings have remained unchanged in the past month. The company’s shares have rallied 13.8% over the past six months. Currently, WFC also carries a Zacks Rank #2.
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State Street (STT) Rides on Expansion Efforts Despite Cost Woes
State Street (STT - Free Report) is poised for growth on the back of business servicing wins, synergies from strategic buyouts, a global footprint and high interest rates. However, persistently elevated expenses and a challenging operating backdrop that is likely to hamper fee income growth are major headwinds.
State Street has witnessed a decent increase in net interest revenues (NIR) and net interest margin (NIM) on the back of higher interest rates. NIR recorded a three-year (ended 2023) compound annual growth rate (CAGR) of 7.8%. Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022, 0.74% in 2021 and 0.97% in 2020.
Though rising funding costs and shrinking non-interest-bearing deposit balance weighed on both NIR and NIM during the first quarter of 2024, high interest rates for a longer period are likely to offer support to both metrics. While we project NIR to decline 4.9% in both 2024 and 2025, the metric will rebound and grow at the rate of 3.9% in 2026.
State Street is continuing with its efforts to strengthen fee income sources. While the company’s total fee revenues declined in 2022 and 2023, the same saw a four-year (2019-2023) CAGR of 1%. This was mainly driven by an increase in client activity and significant market volatility. Even in the first quarter of 2024, the upward momentum continued. Further, servicing assets yet to be installed going forward were $2.3 trillion in 2023 across client segments and regions.
STT remains well-positioned with respect to fundamental business activities, given its global exposure and a broad array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, along with business servicing wins and inorganic growth strategy, are expected to keep supporting fee revenues. We anticipate total fee revenues to witness a CAGR of 3.3% by 2026.
State Street has been expanding its scale by undertaking strategic acquisitions and restructuring efforts. This February, it acquired CF Global Trading, which will further boost its outsourced trading capabilities. Also, as part of the consolidation of its India-based operations, the company has assumed full ownership of its two joint ventures. These are part of STT’s ongoing initiatives to optimize its global operations. The deals, along with past buyouts, are expected to result in revenue and cost synergies, helping the company expand its footprint across the globe.
However, mounting operating expenses are expected to hurt State Street’s bottom line. The total non-interest expenses witnessed a three-year CAGR of 3.2% (ended 2023), with uptrend continuing in the first quarter of 2024. Overall expenses are expected to remain elevated due to higher information systems and communications expenses. Further, inflationary pressure and the company’s strategic buyouts and investments in franchises will put pressure on the expenses. Our estimates for total non-interest expenses imply a CAGR of 1.3% by 2026.
State Street’s largest source of revenues is fee income, which constituted almost 77% of total revenues in the first quarter of 2024. Concentration risk arising from higher dependence on fee-based revenues could significantly alter the company’s financial position if there is any change in individual investment preferences, regulatory amendments or a slowdown in capital market activities.
Shares of this Zacks Rank #3 (Hold) company have lost 1.2% over the past three months against the industry’s rally of 3.1%.
Image Source: Zacks Investment Research
Banks Worth a Look
A couple of better-ranked major bank stocks are Bank of America (BAC - Free Report) and Wells Fargo (WFC - Free Report) .
Estimates for Bank of America’s earnings for 2024 have moved marginally north in the past 30 days. The company’s shares have risen 16.8% over the past six months. At present, BAC carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Estimates for Wells Fargo’s 2024 earnings have remained unchanged in the past month. The company’s shares have rallied 13.8% over the past six months. Currently, WFC also carries a Zacks Rank #2.