State Street (NYSE:STT) is set to report its fourth quarter and financial year 2011 earnings on 18th January, 2012. Last quarter results were better than anticipated due to cost reductions and an improvement in business, even though depressed markets and interest rates continued to trouble the financial sector. Competitors BNY Mellon (NYSE:BK) and BlackRock Inc. (NYSE:BLK) will also announce their result in the same week. We expect State Street to report higher revenues and earnings supported by growth in asset base and cost efficiency resulting from restructuring programs.
We have a $46 as the price estimate for State Street, which shows a premium to the current market share.
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Asset growth might boost revenues
The company has bagged many new servicing contracts while retaining its business with old clients, such as PIMCO. Also, many of these contracts involve providing services to business operations outside of the U.S., such as Asian and Australian operations of Alliance Bernstein, Australian fund SunSuper, and equity mandate from asset management arm of a Swedish bank.
We believe increase in client assets shows company’s ability to weather current market precariousness by staying focused on its customer base. Growing geographic diversification should help the company reduce its dependence on its U.S. operations, which contribute around 70% of its revenue. Investment servicing fees contributes 43% to the Trefis valuation for the stock. We think that a rise in assets under custody will likely benefit the topline growth.
Acquisitions in the past, including Pulse Trading and others in Europe, might add to the revenue growth of the firm. Cost savings from its technology and business operation restructuring program most likely maintain support to earnings, as in Q3.
According to a report by Reuters, custody banks such as State Street and BNY Mellon might have actually benefitted from rising lending levels during the European crisis as demand for securities surged from short seller.  We think that the company remains well positioned to post good results in this quarter.Notes: