State Street (NYSE:STT) has lost its business with the Ohio treasurer’s office after the latter formally ended business ties with the custody bank over an alleged multi-million dollar fraud.  State Street shares this fate along with its larger competitor BNY Mellon (NYSE:BK). Between the two of them, the banks are the custodians of international assets worth more than $41 billion belonging to four of Ohio’s five pension funds. Rivals JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) are tipped to be in the race to add the disgruntled state to their client list.
Our $52 price estimate for State Street is nearly 15% above the current market price. We believe that this premium is largely due to the weak short-term outlook for global custody banking.
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Besides having to hand over the considerably large Ohio state assets portfolio, the loss of this prestigious customer will no doubt have other notable impacts on State Street’s business.
Firstly, the move by Ohio is a blow to the reputation of the global custody bank which enlists other states as its clients. The biggest repercussion of this event for State Street is that other states will look into the matter closely – which could lead to the loss of more such important clients in the near future.
To add to this, State Street may also face legal action from the Ohio state. BNY Mellon already faces a $16 million lawsuit from the state in this matter. In fact, the state of California filed a lawsuit against State Street alleging the same fraud nearly two years ago, and this event may lead to a host of other such lawsuits against the bank in the coming months.Notes: