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State Street (STT) Rides on Strategic Buyouts, Low Rates a Woe

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State Street (STT - Free Report) will be able to capitalize on its new business servicing wins and a strong balance sheet. Also, its strategic acquisitions are expected to continue resulting in substantial synergies and help the company expand its footprint across the globe. However, increasing operating expenses and a decline in margins due to lower rates will likely hurt the company’s financials.

State Street is making efforts to strengthen fee income sources. The company’s total fee revenues witnessed a five-year (2016-2020) compound annual growth rate (CAGR) of 3.7% on the back of a rise in client activity and significant market volatility. The company remains well-positioned, given its global exposure, and a broad array of innovative products and services (including the formation of State Street Digital, a new division focused on catering to the industry's evolving shift to digital finance).

Similar to other major banks like JPMorgan (JPM - Free Report) , Goldman Sachs (GS - Free Report) , and U.S. Bancorp (USB - Free Report) , State Street is expanding its scale by undertaking strategic acquisitions. In September, it inked a $3.5-billion cash deal to acquire Brown Brothers Harriman & Co.’s Investor Services business, which will make it the leading asset servicer globally. Earlier in the same month, the company acquired Mercatus in an effort to provide a fully integrated platform to institutional investors for growing private market segments. These, along with past buyouts, are expected to result in revenue and cost synergies.

Moreover, State Street has a strong balance sheet. Given the consistent earnings growth and solid liquidity position, the company is expected keep meeting debt obligations in the near term, even if the economic situation worsens.

However, near-zero interest rates and the Fed’s accommodative monetary policy stance are expected to continue hurting State Street’s net interest income (NII) and net interest margin (NIM). The company expects NII to be $460-$470 million per quarter for 2021, assuming rates do not deteriorate and premium amortization continues to decrease.

Driven by State Street’s cost-saving efforts, total expenses declined in 2020 while the same witnessed a CAGR of 1.8% over the four years ended 2020. Although the company has been successful in managing expenses through high-cost location workforce reduction and restructuring initiatives, overall costs are likely to remain elevated due to acquisitions.