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State Street (STT) Rides on Expansion Efforts Amid Expense Woes

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State Street Corporation (STT - Free Report) is poised for growth on the back of business servicing wins, synergies from strategic buyouts, a global footprint and high interest rates. However, persistently elevated expenses and a challenging operating backdrop that is likely to hamper fee income growth are major headwinds.

State Street has witnessed a decent increase in net interest revenues (NIR) on the back of higher interest rates. NIR recorded a three-year (ended 2022) compound annual growth rate (CAGR) of 7.5%. Net interest margin (NIM) also expanded to 1.03% in 2022 from 0.74% in 2021 and 0.97% in 2020. With the Federal Reserve expected to keep rates high in the near term, the company’s NIR and NIM are anticipated to benefit from the same. However, rising funding costs and a decline in non-interest-bearing deposit balance are expected to weigh on both metrics. We project NIR to rise 3.1% this year, and NIM to be 1.14% for 2023.

State Street is continuing with its efforts to strengthen fee income sources. The company’s total fee revenues witnessed a three-year (2019-2022) CAGR of 1.6%. Further, it recorded $3.6 trillion in business servicing wins in 2022 across client segments and regions. Moreover, at the end of the second quarter of 2023, servicing assets to be installed in future periods totaled $2.4 trillion.

The company remains well-positioned with respect to fundamental business activities, given its global exposure and a broad array of innovative products and services (including the launch of State Street Digital and State Street Alpha). These, along with business servicing wins and inorganic growth strategy, are expected to keep supporting fee revenues.

While we project total fee income to decline 1.8% in 2023, the same is expected to rebound with 1.7% and 6.5% year-over-year growth in 2024 and 2025, respectively.

State Street has been expanding its scale by undertaking strategic acquisitions. In March, the company announced an agreement to acquire CF Global Trading to further expand outsourced trading capabilities. In 2021, it acquired Mercatus to provide a fully integrated platform to institutional investors for growing private market segments. These, along with past buyouts, are expected to continue resulting in revenues and cost synergies and help the company expand its footprint across the globe.

However, elevated operating expenses are expected to continue to hurt State Street’s bottom line. The total non-interest expenses grew in the first half of 2023. Although the company has successfully managed expenses through high-cost location, workforce reduction and restructuring initiatives, overall costs are likely to remain elevated due to higher Information systems and communications expenses. Our estimates for total non-interest expenses reflect a CAGR of 5% over the next three years.

State Street’s largest source of revenues is fee income, which constituted more than 80% of total revenues in the first half of 2023. Concentration risk emanating from higher dependence on fee-based revenues could significantly alter the company’s financial position, if there is any change in individual investment preferences, regulatory amendments or a slowdown in capital market activities.

Shares of this Zacks Rank #3 (Hold) company have lost 22.9% over the past six months compared with the industry’s decline of 5.8%.

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Banks Worth a Look

A couple of better-ranked bank stocks are JPMorgan (JPM - Free Report) and Pathward Financial, Inc. (CASH - Free Report) .

JPMorgan currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for JPM’s earnings has been revised marginally upward for 2023 over the last seven days. JPM shares have rallied 12.4% over the past six months. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Earnings estimates for Pathward Financial have been revised 5.3% upward for the current year over the last seven days. In the past six months, CASH’s shares have gained 4.7%. Currently, the company carries a Zacks Rank #2.

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