VALUATION HIGHLIGHTS

1. Investment Services (Asset Servicing, Forex & Other Trading, Securities Finance & Other) constitute 79% of the Trefis price estimate for State Street's stock.
2. Investment Management constitutes 21% of the Trefis price estimate for State Street's stock.

WHAT HAS CHANGED?

Latest Earnings

In Q4 2023, State Street's revenues was $3.04 billion - 4% lower than the year-ago period. It was driven by a 14% y-o-y drop in the net interest income.

Impact of coronavirus outbreak

State Street is a custody banking giant that generates most of its revenues from asset servicing fees, which it charges as a percentage of Assets under Custody & Administration (AUC/A). It generated around 65% of its revenues from asset Servicing business in 2019 and has roughly $33.2 trillion in Assets under Custody & Administration. As a result of the economic uncertainty and widespread panic, the company's stock initially suffered losses due to a drop in asset valuations driven by net market losses. However, the recent rally in the securities market has improved asset valuations to a large extent. That said, The bank's net interest income has suffered in 2020 due to the lower interest rate environment. While the company's revenues in Q1 and Q2 2020 increased slightly, Q3 and Q4 revenues were lower than the year-ago period. This resulted in a marginal drop in full-year 2020 revenues on a year-on-year basis. Further, the same trend continued in the Q1 FY2021 results. However, the Q2, Q3, and Q4 earnings saw some recovery in the top line driven by asset growth.

The company posted revenues of $12.15 billion and $12.03 billion in FY2021 and FY2022 respectively. However, revenues decreased to $11.94 billion in FY2023.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of State Street's value that present opportunities for upside or downside to the current Trefis price estimate for State Street:

• Servicing & Administration Fee as % of Assets under Custody: State Street is highly sensitive to this driver because asset custody is the firm's primary business and the fact that it has over $38 trillion in assets under custody. Fees have been declining as a percentage of assets due to competition and economic conditions. We expect fees to remain around 0.010% of assets over our forecast period. However, if the company is forced to cut fees in response to increasing competition from local players, and the figure falls to 0.008% over the same period, it would present a downside of about 4% to the Trefis price estimate.
• State Street's Assets Under Custody and Administration: We currently forecast State Street's assets under custody to increase from $38 trillion in 2021 to well over $44 trillion by the end of the Trefis forecast period. However, faster than expected increase in custody mandates coupled with a strong appreciation in the market value of custody assets could boost this figure to $53.6 trillion by the end of our forecast period. In that case, there would be an upside of about 6% to the Trefis price estimate.

BUSINESS SUMMARY

State Street provides investment servicing and investment management services to institutional investors such as mutual funds, corporate and public retirement plans, insurance companies, and endowments.

State Street's primary business is Investment Servicing, which entails global custody, fund services, liquidity services, and securities lending. The company earns a fee from its customers, generally a small percentage of total assets under custody.

State Street's Investment Management business includes advisory services, investment research, and management of assets such as equity and fixed-income securities, ETFs and cash, and money market instruments.

State Street's main competitors include Bank of New York Mellon, JPMorgan Chase, Citigroup, BlackRock, and Vanguard.

SOURCES OF VALUE

Complementary Investment Servicing and Investment Management businesses allow competitive fees

Since State Street has an in-house investment servicing business, it can offer investment management services at lower advisory fees. Most asset managers have to outsource trading and execution functions to other custody banks. They are forced to charge higher fees to compensate for the costs associated with custody, trading, and executing transactions. Additionally, State Street's Investment Servicing business helps it attract institutional clients, to whom it can provide advisory services in addition to the custody of financial securities.

Size and scale of operations

State Street is a leading custodian of assets with assets under custody and administration in excess of $38 trillion. It manages assets worth almost $3.5 trillion and is present in over 100 markets across 29 countries. State Street benefits from economies of scale, which enable it to dilute operating costs (those associated with people and technology setup) over a larger asset pool and investor base, thereby improving operating margins.

KEY TRENDS

Worldwide growth in demand for asset management services

Global assets under management (AuM) are expected to cross $111 trillion by 2020. As economic conditions improve, we expect fund inflows to increase. Additionally, growing wealth in emerging markets like Asia-Pacific and Middle East & Africa regions will likely result in additional demand for asset management services (and as a result, asset servicing).

Increase in cross-border investments and complex assets

Investors increasingly invest in cross-border assets, in emerging markets, and in more complex (structured) financial instruments. These generally require the presence of large global custodians and not local/regional players or financial service providers' in-house investment servicing teams. Larger custodians like State Street and BNY Mellon will benefit greatly from this trend.

Growth in mutual funds and private pension plan providers

In many countries across the globe and mainly in emerging economies, the state is withdrawing from its role as a primary pension provider, which is causing people to invest in defined-contribution pension plans and mutual funds. Since custody providers serve institutional investors such as mutual and pension funds, custodians exhibit promising growth prospects in terms of the size of Assets under Custody.

Changes in asset management fee structure

The recent financial crisis has resulted in more transparency in the pricing of asset management services. As a result, we expect performance fees (which look at longer investment horizons than before) to increase as a percentage of fees as opposed to management fees, which are simply charged as a percentage of AuM.