State Street Rides on Relatively High Rates & Buyouts Amid High Costs

State Street Corp STT remains well-positioned for growth on the back of relatively higher interest rates, efforts to improve fee income, strategic acquisitions, and a solid balance sheet. However, a rising expense base and concentrated fee-based revenues remain concerns.

State Street’s Growth Drivers

Higher Rates to Aid Net Interest Revenues: 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. NII experienced a compound annual growth rate (CAGR) of 7.4% over the four years ended 2024.

On the other hand, NIM contracted to 1.10% from 1.20% in 2023 due to higher funding costs and lower non-interest-bearing deposit balances. Both NII and NIM declined during the first three months of 2025.

Nonetheless, relatively higher interest rates along with the company’s investment portfolio repositioning effort are expected to support NII and NIM growth. Our estimate for NII indicates a CAGR of 3.1% over the next three years. Also, we project NIM to be 1.01% in 2025.

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 (2020-2024) CAGR of 1.7%. This growth was primarily driven by increased client activity and substantial market volatility.

Also, AUC/A and AUM recorded a four-year (ended 2024) CAGR of 4.7% and 8%, respectively. The uptrend continued for fee income, AUC/A and AUM in the first three months of 2025.
 
Further, servicing assets yet to be installed were $2.3 trillion in 2023 and $3 trillion in 2024 across client segments and regions. As of March 31, 2025, servicing assets yet to be installed were $3.06 trillion.
 
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 anticipate total fee revenues to grow 3.2% in 2025, with AUM and AUC/A rising 3% and 2.9%, respectively.

Strategic Buyouts: State Street has been expanding its scale via strategic acquisitions and restructuring efforts. Last month, it partnered with smallcase to cater to investors in India seeking global exposure. This April, it collaborated with Ethic Inc. to offer customized investment solutions to institutional and financial intermediary clients. In February, State Street agreed to acquire global custody and related businesses outside of Japan from Mizuho Financial Group, Inc.
 
In November 2024, State Street Global Advisors joined forces with Bridgewater Associates to boost its core alternative investment strategies, while, in September, the company partnered with Apollo Global to enhance investors' accessibility to private markets. Further, in 2024, it announced the acquisition of a 5% stake in Australia-based Raiz Invest Limited, a strategic partnership with Taurus, and the completion of the buyout of CF Global Trading.
  
Additionally, as part of the consolidation of its global operations, it announced the restructuring of the nearly 20-year-old European component of the International Financial Data Services (IFDS) LP joint venture (JV) arrangement in Luxembourg and Ireland, consolidated its India-based operations, and assumed full ownership of its two JVs. Such opportunistic buyouts and expansion initiatives are expected to lead to revenue and cost synergies alongside expanding the company’s footprint globally.

Encouraging Capital Distributions: State Street has a solid balance sheet.  As of March 31, 2025, the company had a total debt of $36.7 billion, while cash and due from banks and interest-bearing deposits with banks were $124.1 billion.

Also, STT has hiked its quarterly dividend by 10% to 76 cents per share following the clearance of its 2024 stress test. Moreover, in January 2024, the company authorized the buyback of shares worth up to $5 billion, with no expiration date.

As of March 31, 2025, roughly $3.6 million worth of shares remained available for repurchase under authorization. The company intends to distribute roughly 80% of its earnings to shareholders this year, with a higher repurchase activity during the second quarter of 2025.
 
Given a solid balance sheet and capital position alongside earnings strength, the company will likely keep its capital distributions sustainable going forward.

Roadblocks for STT

Rising Expenses to Hurt Profitability: State Street has been witnessing a persistent rise in operating expenses. Last year, the company was successful in managing expenses through high-cost location workforce reduction, business consolidation and restructuring initiatives. These efforts resulted in almost $550 million in gross cost savings.
 
Nonetheless, total non-interest expenses witnessed a four-year CAGR of 2.3% (ended 2024). Though the trend reversed in the first quarter of 2025, expenses are likely to remain elevated owing to higher Information systems and communications expenses, inflationary pressure and expansionary efforts. We anticipate total non-interest expenses (adjusted) to increase 3%, 2.1% and 4.7% in 2025, 2026 and 2027, respectively.

Concentrated Fee-based Revenues: STT’s largest revenue source is fee income, which constituted 78.3% of total revenues in the first quarter of 2025. Though fee income majorly supported the company’s top line in 2024 and the first quarter of 2025, significant volatility in the capital markets is worrisome, putting a strain on the metric’s future trajectory.
 
Also, concentration risk arising 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 markets activities.

Zacks Rank & Price Performance for STT

Shares of STT have gained 28.9% compared with the industry’s rise of 19%. STT currently carries a Zacks Rank #3 (Hold).

Banks Worth a Look

A couple of top-ranked bank stocks are First Financial Corporation THFF and Civista Bancshares, Inc. CIVB, sporting a Zacks Rank #1 (Strong Buy) each. You can see the complete list of today's Zacks #1 Rank stocks here.
 
The Zacks Consensus Estimate for THFF has remained unchanged for 2025 over the past month. The stock price has increased 2.3% over the past six months.

Earnings estimates for CIVB have remained unchanged for the current year over the past month. In the past six months, CIVB’s shares have lost 3.1%.

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This article originally published on Zacks Investment Research (zacks.com).

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