Business Strategy & Outlook

State Street provides a range of asset servicing and ancillary servicing, including maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers. Although State Street is a market leader, its asset manager and asset owner clients are sophisticated on the pricing of its custody and ancillary services. In addition, as asset managers consolidate and face industry wide fee pressure, they are increasingly seeking operating expense savings. State Street saw pricing compression of 4% in 2018 and 2019, though it did appear to moderate to about 2.5% in 2020. In addition, low interest rates continue to pressure net interest income, but this is showing signs of moderating. Following its announced acquisition of Brown Brothers Harriman, which is expected to close in the third quarter of 2022, State Street will be the largest custodian by assets under custody. Given pressures in the industry, the management to continue to focus on managing expenses. With the acquisition of Charles River Development in 2018, State Street is emphasizing its integrated “front to back” offering (branded as State Street Alpha), which it believes will lead to stickier, high-revenue-generating customer relationships. State Street’s back-office offerings include custody, fund accounting, and fund administration. Its middle office includes client reporting, post-trade workflows, investment risk monitoring, and performance/attribution analysis. State Street’s front office includes Charles River’s portfolio modeling and data-management software as well as legacy State Street’s foreign-exchange trading and securities finance solutions.

State Street is also one of the largest global asset managers, with over $3 trillion in primarily passive assets under management. This business, which is less than 15% of the firm’s revenue, has underperformed. Media reports indicate that the firm may explore strategic alternatives, including a joint venture; while such a course of action may make strategic sense, it won’t materially affect the fair value estimate.

Financial Strengths

State Street’s financial structure is sound. As of Dec. 31, 2021, the firm had a common equity Tier 1 ratio (advanced) of 14.3%, comfortably exceeding its regulatory minimum of 8.5%. State Street’s supplementary leverage ratio was 7.4%, above the 5% minimum. While the firm had some extraordinary losses during the financial crisis related to asset-backed commercial paper, it has learned from the crisis and looks quite unlikely to see a repeat of this. In addition, the balance sheet is conservatively invested and the firm’s loans and leases have resulted in relatively low charge-offs. The company did increase its provisions amid the COVID-19 epidemic but has since released these as the economy performed better than expected in 2021.

Bulls Say

• With the acquisition of Charles River Development, State Street’s front-to-back offerings offer competitive advantages and should lead to a greater wallet share of clients and stickier client relationships.
• In comparison with a traditional bank, only about one fourth of State Street’s revenue is from net interest income, and the firm has very modest exposure to credit risk.
• A joint venture or sale of its asset-management business could unlock value for shareholders.

Company Description

State Street is a leading provider of financial services, including investment servicing, investment management, and investment research and trading. With approximately $43.7 trillion in assets under custody and administration and $4.1 trillion assets under management as of Dec. 31, 2021, State Street operates globally in more than 100 geographic markets and employs more than 38,000 worldwide.

(Source: Morningstar)

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