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State Street (STT) Rides on Rising AUM Amid Higher Expenses
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State Street Corp (STT - Free Report) remains well-poised for growth on the back of higher asset under management (AUM), higher interest rates, efforts to improve fee income and strategic acquisitions. However, a rising expense base and concentrated fee-based revenues remain concerns.
State Street’s net interest revenue (NIR) and net interest margin (NIM) are anticipated to witness a modest expansion amid the high interest rates scenario. Though both metrics declined over the past couple of years due to low interest rates, they reflected a solid improvement in 2022 and 2023. NIR experienced a compound annual growth rate (CAGR) of 7.8% over the three years ended 2023.
Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022. While high funding costs and lower non-interest-bearing deposit balance exerted pressure on NIR and NIM during the first half of 2024, high interest rates for a longer period will likely aid both metrics in the upcoming quarters. We estimate NIR to remain relatively stable in both 2024 and 2025. In 2026, the metric is expected to rebound and rise 3.4% year over year.
STT remains focused on its efforts to improve fee income sources. Though the company’s total fee revenues dipped in 2022 and 2023, the metric reflected a four-year (2019-2023) CAGR of 1%. This growth was primarily driven by increased client activity and substantial market volatility. The uptrend continued during the first six months of 2024. Moreover, servicing assets yet to be installed were $3.5 trillion in 2021, $3.6 trillion in 2022, and $2.3 trillion in 2023 across client segments and regions.
Notably, the company had $2.4 trillion of servicing assets to be installed at the end of the second quarter of 2024. State Street remains well-positioned in terms of fundamental business activities, given its global exposure and a wide array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, combined with business servicing wins and inorganic growth measures, are anticipated to bolster fee revenues. We project total fee revenues to rise 4.4% this year.
State Street has been expanding its scale via strategic acquisitions and restructuring efforts. This February, the company acquired CF Global Trading, which will further enhance outsourced trading capabilities. Further, 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. In 2021, it acquired Mercatus to offer a fully integrated platform to institutional investors for growing private market segments. Such opportunistic buyouts are expected to lead to revenue and cost synergies alongside expanding the company’s footprint globally.
Nonetheless, escalating operating expenses are likely to dampen State Street’s bottom-line expansion. Though total non-interest expenses dipped marginally in 2022 on the back of cost-saving efforts, the metric witnessed a 3.2% CAGR over the three years ended 2023. The uptrend continued during the first half of 2024. While the company has been managing its expenses to some extent through a reduction in high-cost location workforce, business consolidation and restructuring initiatives, overall expenses are likely to stay elevated amid the higher information systems and communications expenses. Further, inflationary pressures and the company’s strategic acquisitions and investments in franchises will exert pressure on expenses. Per our estimates, total non-interest expenses are expected to reflect a CAGR of 1.6% by 2026.
Additionally, STT’s fee income accounts for 77% of its total revenues for the first half of 2024. Markedly, the metric has declined for the last three years. While fee income primarily aided the company’s top line in the first half of 2024, higher capital market volatility remains a headwind, straining the metric’s growth trajectory going forward. Further, concentration risk associated with higher reliance on fee-based revenues could substantially alter the company’s financial position driven by a shift in individual investment preferences, regulatory amendments or a slowdown in capital markets.
Year to date, shares of STT have gained 1% compared with the industry’s rise of 14%. STT currently carries a Zacks Rank #3 (Hold).
The Zacks Consensus Estimate for JPM has been revised upward by 1.6% for 2024 over the past 30 days. The stock price has increased 18.4% over the past six months.
Earnings estimates for BKU have been revised marginally upward for the current year over the past week. In the past six months, BKU’s shares have risen 29.5%.
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State Street (STT) Rides on Rising AUM Amid Higher Expenses
State Street Corp (STT - Free Report) remains well-poised for growth on the back of higher asset under management (AUM), higher interest rates, efforts to improve fee income and strategic acquisitions. However, a rising expense base and concentrated fee-based revenues remain concerns.
State Street’s net interest revenue (NIR) and net interest margin (NIM) are anticipated to witness a modest expansion amid the high interest rates scenario. Though both metrics declined over the past couple of years due to low interest rates, they reflected a solid improvement in 2022 and 2023. NIR experienced a compound annual growth rate (CAGR) of 7.8% over the three years ended 2023.
Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022. While high funding costs and lower non-interest-bearing deposit balance exerted pressure on NIR and NIM during the first half of 2024, high interest rates for a longer period will likely aid both metrics in the upcoming quarters. We estimate NIR to remain relatively stable in both 2024 and 2025. In 2026, the metric is expected to rebound and rise 3.4% year over year.
STT remains focused on its efforts to improve fee income sources. Though the company’s total fee revenues dipped in 2022 and 2023, the metric reflected a four-year (2019-2023) CAGR of 1%. This growth was primarily driven by increased client activity and substantial market volatility. The uptrend continued during the first six months of 2024. Moreover, servicing assets yet to be installed were $3.5 trillion in 2021, $3.6 trillion in 2022, and $2.3 trillion in 2023 across client segments and regions.
Notably, the company had $2.4 trillion of servicing assets to be installed at the end of the second quarter of 2024. State Street remains well-positioned in terms of fundamental business activities, given its global exposure and a wide array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, combined with business servicing wins and inorganic growth measures, are anticipated to bolster fee revenues. We project total fee revenues to rise 4.4% this year.
State Street has been expanding its scale via strategic acquisitions and restructuring efforts. This February, the company acquired CF Global Trading, which will further enhance outsourced trading capabilities. Further, 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. In 2021, it acquired Mercatus to offer a fully integrated platform to institutional investors for growing private market segments. Such opportunistic buyouts are expected to lead to revenue and cost synergies alongside expanding the company’s footprint globally.
Nonetheless, escalating operating expenses are likely to dampen State Street’s bottom-line expansion. Though total non-interest expenses dipped marginally in 2022 on the back of cost-saving efforts, the metric witnessed a 3.2% CAGR over the three years ended 2023. The uptrend continued during the first half of 2024. While the company has been managing its expenses to some extent through a reduction in high-cost location workforce, business consolidation and restructuring initiatives, overall expenses are likely to stay elevated amid the higher information systems and communications expenses. Further, inflationary pressures and the company’s strategic acquisitions and investments in franchises will exert pressure on expenses. Per our estimates, total non-interest expenses are expected to reflect a CAGR of 1.6% by 2026.
Additionally, STT’s fee income accounts for 77% of its total revenues for the first half of 2024. Markedly, the metric has declined for the last three years. While fee income primarily aided the company’s top line in the first half of 2024, higher capital market volatility remains a headwind, straining the metric’s growth trajectory going forward. Further, concentration risk associated with higher reliance on fee-based revenues could substantially alter the company’s financial position driven by a shift in individual investment preferences, regulatory amendments or a slowdown in capital markets.
Year to date, shares of STT have gained 1% compared with the industry’s rise of 14%. STT currently carries a Zacks Rank #3 (Hold).
Image Source: Zacks Investment Research
Banks Worth a Look
A couple of better-ranked bank stocks are JPMorgan (JPM - Free Report) and BankUnited, Inc. (BKU - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for JPM has been revised upward by 1.6% for 2024 over the past 30 days. The stock price has increased 18.4% over the past six months.
Earnings estimates for BKU have been revised marginally upward for the current year over the past week. In the past six months, BKU’s shares have risen 29.5%.