State Street’s stock (NYSE: STT) has lost 26% YTD, as compared to the 16% decline in the S&P500 over the same period. The recent decline was primarily due to record high inflation figures in the U.S., the aggressive rate hikes by the Federal Reserve fueling the fear of the economy plunging into recession, and geopolitical tensions.
The stock is currently trading at $68 per share, which is 27% below its fair value of $94 – Trefis’ estimate for State Street’s valuation. The custody banking giant topped the consensus estimates in the first quarter, with revenues increasing 4% y-o-y to $3.1 billion. It was driven by a 9% rise in net interest income (NII), which primarily benefited from higher interest-earning assets and improvement in the net interest margin. Further, the total fee revenue, which contributed 84% of the top line, grew 4% y-o-y in the quarter. This was despite a 4% drop in the Assets under Custody & Administration (AuC/A) from the December 31st level to $41.7 trillion, followed by a 3% decline in the Assets under Management (AuM) to $4 trillion over the same period. Overall, the adjusted net income increased 19% to $583 million, thanks to revenue growth and lower expenses as a % of revenues.
The bank’s revenues increased 3% y-o-y to $12 billion in 2021. It was primarily due to a 7% rise in the servicing fees and a 9% growth in the management fees. Notably, both the fees together contribute more than 60% of the total revenues. The above growth was partially offset by a 13% drop in the NII due to a lower interest rate environment. On the asset front, the firm’s AuC/A improved 13% y-o-y to $43.7 trillion, coupled with a 19% rise in the AuM to $4.1 trillion. All in all, the adjusted net income increased 14% y-o-y to $2.6 billion.
The Federal Reserve has so far increased the benchmark interest rates by 0.75% in 2022. Further, we anticipate more rate hikes by the central bank in the current year. This will likely benefit the NII of State Street. On the flip side, the servicing fee and management fee are likely to see stagnant growth over the subsequent quarters. Overall, State Street revenues are expected to remain around $12.8 billion in FY2022. Additionally, STT’s adjusted net income margin is likely to be 20%, leading to an adjusted net income of $2.56 billion and an annual EPS of $7.48. This coupled with a P/E multiple of just below 13x will lead to the valuation of $94.
|S&P 500 Return||-3%||-16%||80%|
|Trefis Multi-Strategy Portfolio||-4%||-20%||218%|
 Month-to-date and year-to-date as of 5/16/2022
 Cumulative total returns since the end of 2016