State Street Shines As Fee Income Climbs To A Record


State Street ( STT ) continues to impress with another strong quarterly performance this time around with the global custody banking giant reporting a pre-tax income figure of $762 million for the period - the best since Q3 2010, thanks to a record performance by its asset servicing business. This ignores the $941 million in pre-tax income reported in Q3 2012 as the result included a one-time benefit of $362 million from claims settlement. The bank, which is also a leading player in the global asset management business, generated $1.97 billion in total fee revenues over the quarter making this the second-best quarter by this count in its history with the bank doing just slightly better in Q2 2008 with $2 billion in total fee revenues.

Improving equity valuations also helped increase the size of State Street's assets under custody & administration (AUC/A) from $25.4 billion at the end of Q1 2013 to $25.7 billion. The asset growth came with a better improvement in asset servicing fees which rose to a record $1.2 billion for the quarter.

The improving asset servicing fees coupled with the prospects of reducing interest margin pressures over coming quarters supports our decision to increase our price estimate for State Street's stock from $62 to $70 .

See our full analysis for State Street

Investment Servicing Fee Growth Shows State Street Is On The Right Track

State Street churned out record servicing fees again this quarter - improving the $1.18 billion for Q1 2013 quarter to reach $1.2 billion this quarter. The servicing fee is earned by State Street for its services as the custodian of financial assets on behalf of institutional investors such as mutual funds, insurance companies, foundations, endowments and other investment pools. And its importance for the company becomes immediately evident from the chart above, as these fees contribute to nearly half of State Street's total value.

Intense competition in the custody banking industry, especially among the giants BNY Mellon ( BK ), JPMorgan Chase ( JPM ) and Citigroup ( C ), along with State Street has resulted in a reduction in fee revenues as a percentage of assets for all market players over recent quarters. Improving market conditions are finally aiding the custody banks in generating more revenues - something that was also demonstrated by BNY Mellon in its earnings for this quarter (see Higher Fee Revenues Help BNY Mellon Post Strong Q2 Results).

Although The Asset Management Business Could Do Better

State Street's total assets under management have shrunk slightly this quarter - the result of a loss in value across debt markets towards the end of the quarter. And while this was largely expected, State Street seems to be falling behind its peers BlackRock and Vanguard in the race for garnering a bigger share in the global exchange-traded funds ( ETF ) industry - something we pointed out in the article State Street Struggles To Make The Most Of The ETF Growth Story.

Hopefully, this situation improves for State Street over the coming quarter.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BK , C , ETF , JPM , STT



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