State Street’s stock (NYSE: STT) has lost 32% YTD, as compared to the 23% decline in the S&P500 over the same period. Further, the stock is currently trading at $63 per share, which is 23% below its fair value of $82 – Trefis’ estimate for State Street’s valuation. The custody banking giant posted mixed results in the second quarter of 2022, with earnings outperforming the consensus but revenues missing the mark. It reported total revenues of $2.95 billion – down 3% y-o-y, driven by a 25% rise in net interest income (NII) and growth in foreign exchange trading services. The NII benefited from higher short and long-term interest rates and growth in loan balances. On the flip side, all the components of the total fee income, except foreign exchange trading services, witnessed negative growth, leading to a 6% y-o-y decrease to $2.37 billion. Further, the Assets under Custody & Administration (AuC/A) and Assets under Management (AuM) fell 10% and 11% y-o-y, respectively. Overall, the adjusted net income decreased 2% to $712 million.
The bank’s revenues grew 1% y-o-y to $6 billion in the first half of 2022. It was primarily due to a 17% rise in NII because of higher interest rates and loan growth. That said, the servicing fees decreased 4% y-o-y over the first two quarters. All in all, the adjusted net income increased 6% y-o-y to $1.3 billion.
The Federal Reserve has increased the benchmark interest rates five times in 2022. This has benefited the NII of the bank, which is likely to continue over the subsequent quarters. However, the servicing and management fee is likely to remain under pressure for some more time. Notably, the Q3 consensus estimates for revenues are $2.97 billion. We expect State Street’s revenues to remain around $12.12 billion in FY2022. Additionally, STT’s adjusted net income margin is likely to remain around 20%, leading to an adjusted net income of $2.42 billion and an annual GAAP EPS of $6.84. This coupled with a P/E multiple of 12x will lead to the valuation of $82.
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