State Street Rides on High Rates, Fee Income & Strategic Buyouts
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State Street Corp STT remains well-positioned for growth on the back of higher interest rates, efforts to improve fee income and strategic acquisitions. However, a rising expense base and concentrated fee-based revenues remain concerns. Nonetheless, solid capital distributions are another positive.
State Street’s Growth Drivers
Higher Rates to Aid Net Interest Revenue: State Street’s net interest income (NII) and net interest margin (NIM) are anticipated to witness a modest expansion amid the relatively high-interest rate scenario. Both reflected a solid improvement in 2022 and 2023, driven by higher rates. NII experienced a compound annual growth rate (CAGR) of 7.8% over the three years ended 2023.
Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022. High funding costs and lower non-interest-bearing deposit balances exerted pressure on NII and NIM during the first nine months of 2024.
As the Federal Reserve signaled future rate cuts, funding costs are anticipated to stabilize eventually. Also, the company’s investment portfolio repositioning initiative will aid NII and NIM growth. Our estimate for NII indicates a CAGR of 2.8% over the next three years.
Efforts to Bolster Fee Income: STT remains focused on improving fee income sources. Though the company’s total fee revenues dipped in 2022 and 2023, the metric reflected a four-year (2019-2023) CAGR of 1%. This growth was primarily driven by increased client activity and substantial market volatility. The uptrend continued during the first nine months of 2024. Moreover, servicing assets yet to be installed were $3.5 trillion in 2021, $3.6 trillion in 2022 and $2.3 trillion in 2023 across client segments and regions.
Notably, the company had $2.4 trillion of servicing assets to be installed at the end of the third quarter of 2024. State Street remains well-positioned fundamentally on account of its global exposure and a wide array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These efforts, combined with business servicing wins and inorganic growth measures, are anticipated to bolster fee revenues. We project total fee revenues to rise 5.3% this year.
Strategic Buyouts: State Street has been expanding its scale via strategic acquisitions and restructuring efforts. This September, the company collaborated with Apollo to boost investors' accessibility to private markets, while in August, it announced its plan to acquire a 5% stake in Australia-based Raiz Invest Limited and a strategic partnership with Taurus.
Further, in February, the company acquired CF Global Trading to expand its outsourced trading capabilities. Further, as part of the consolidation of its India-based operations, the company has assumed full ownership of its two joint ventures. These are part of STT’s ongoing initiatives to optimize its global operations. Such opportunistic buyouts are expected to lead to revenue and cost synergies alongside expanding the company’s footprint globally.
Encouraging Capital Distributions: STT has hiked its quarterly dividend by 10% to 76 cents per share following the clearance of its 2024 stress test. Moreover, this January, the company authorized the buyback of shares worth up to $5 billion, with no expiration date.
As of Sept. 30, 2024, roughly $4.3 million worth of shares remained available for repurchase under authorization. The company intends to distribute 80-90% of its earnings to shareholders this year. Given a solid capital position and earnings strength, the company will likely keep its capital distributions sustainable going forward.
Nonetheless, rising operating expenses and concentrated fee-based revenues alongside volatile capital markets are near-term concerns.
