State Street’s Q3 Results Hurt By Slowing Asset Growth, Shrinking Interest Income

+10.57%
Upside
77.32
Market
85.49
Trefis
STT: State Street logo
STT
State Street

Investors began expressing concerns about State Street’s (NYSE:STT) performance figures for the third quarter almost immediately after the custody banking giant released them on Tuesday, with its share price tanking nearly 5% within hours of the announcement. [1] While the share price has recovered partially since then, the reaction still may be somewhat overblown. After all, the bank beat earnings estimates despite missing on revenue estimates – a trend displayed by most of the banks this quarter. In fact, the marked decline in its operating expenses for the quarter was a big positive – so what is it that investors weren’t happy about?

We believe the answer is that State Street fared somewhat poorly relative to its biggest rivals in each of the two financial services segment it has a commanding position in – custody banking and asset management. State Street’s 1.1% increase in assets under custody & administration (AUC/A) could not match the 4% growth figure for the largest custody bank BNY Mellon (NYSE:BK) over the same period. At the same time, State Street’s 4% growth in assets under management (AUM) is far below the 11.5% figure reported by BlackRock (NYSE:BLK), the world’s largest asset manager. The fact that BNY Mellon and BlackRock reported their earnings earlier raised the bar considerably for State Street, and the banking giant failed to match either of their performances.

Also, the bank reported a net interest income of just $546 million this quarter – the lowest since Q3 2008, when the figure was $525 million. Given the importance of net interest income for the overall value of a custody bank, the concerns are understandable..

Relevant Articles
  1. Trailing S&P500 By 14% YTD, What To Expect From State Street Stock?
  2. Down 6% Since The Beginning Of 2023, What Should You Expect From State Street Stock?
  3. State Street Stock Has A 45% Upside To Its Pre-Inflation Shock
  4. What To Expect From State Street Stock In Q2?
  5. State Street Stock Is Undervalued
  6. Where Is State Street Stock Headed?

We maintain a $73 price estimate for State Street’s stock, which is about 10% ahead of the current market price.

See our full analysis for State Street

State Street Has Had Issues Growing Its Asset Base

As we pointed out above, the growth in State Street’s assets has been notably lower than those of its biggest competitors for the quarter. While a decent portion of the improvements for BNY Mellon and BlackRock can be attributed to appreciation in the value of securities rather than net inflows, the fact that State Street could not put up a similar performance is no doubt a cause for concern. This is because intense competition in the custody banking and asset management industry has resulted in a reduction in fee revenues as a percentage of assets for most market players, forcing them to resort to asset growth in order to increase revenues over recent years.

But it should be noted that the quarter-on-quarter growth in assets reported by State Street translated to yet another quarter of record servicing fees. State Street generated $1.21 billion in these fees this quarter – marginally higher than the $1.2 billion figure for the previous quarter and 10% above the Q3 2012 figure of $1.1 billion. The servicing fee is earned by State Street for its services as the custodian of financial assets on behalf of institutional investors such as mutual funds, insurance companies, foundations, endowments and other investment pools. And its importance for the company is evidenced by the chart above, as these fees contribute to nearly half of State Street’s total value.

Making Progress On Cutting Costs

State Street’s operating expenses of $1.7 billion for the quarter were 3% below the figure for the same quarter last year (adjusted for a one-time claims resolution of $362 million in Q3 2012) and also 4% below that for the previous quarter. The bank has been trying to reduce costs for several quarters now, and has also been exploring ways to improve operating efficiency. The improvements over the quarter are good news, as State Street’s stock value is quite sensitive to its operating margins – something that can be seen by making changes to the chart below.

Submit a Post at Trefis Powered by Data and Interactive ChartsUnderstand What Drives a Stock at Trefis

Notes:
  1. Q3 2013 Financial Results, State Street Press Releases, Oct 22 2013 []