State Street Corp.’s STT shares have touched a 52-week high of $87.27 on Friday. The stock closed the session a tad lower at $87.10, gaining 17.7% in the past six months.
The stock has outperformed the industry, the S&P 500 Index, and its peers KeyCorp KEY, Comerica Inc. CMA and Northern Trust Corp. NTRS in the same time frame.
Six-Month Price Performance Chart
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STT’s improving fee income through strategic buyouts and business servicing wins, alongside a solid balance sheet, will keep aiding its financials.
Favorable Estimate Revision Trends for STT
Over the past month, the Zacks Consensus Estimate for 2024 and 2025 earnings per share of $8.13 and $8.96, respectively, has moved marginally upward. These metrics imply growth of 6.1% for this year and 10.2% for 2025.
Estimate Revision Trend
Image Source: Zacks Investment Research
Growth Catalysts for State Street
Fed’s Rate Cut Decision to Support Net Interest Income (NII): The Federal Reserve chairman Jerome Powell, in his speech on Aug. 23, stated, “The time has come for policy to adjust.” This set the stage for the first interest rate cut since March 2020. The rate cut will strengthen STT’s NII and margins through lower funding costs.
Existing interest rates are at a 23-year high level of 5.25-5.5%. These rates are having a manifold effect on the banks, including STT. While higher interest rates led to substantial growth in NII, the rising funding costs have been straining NII and the net interest margin (NIM).
State Street’s NII witnessed a 7.8% compound annual growth rate (CAGR) over the three years ended 2023 on the back of higher rates. Similarly, NIM expanded to 1.20% in 2023 from 1.03% in 2022, 0.74% in 2021 and 0.97% in 2020.
Both metrics declined in the first six months of 2024 due to higher funding costs and a shift toward interest-bearing deposits.
The interest rate cuts will lead to the stabilization of the deposit costs for STT. Also, as rates come down, the demand for loans will improve. This, in turn, will lead to an improvement in NII and NIM.
Management anticipates NII to grow marginally this year driven by the efforts to bolster NII that include higher client engagement to offer financing, leading to higher deposits, loans, and sponsor repo balances alongside prudent expansion of the investment portfolio in the second quarter.
We project NII to be relatively stable in 2024 and 2025, with subsequent growth of 3.4% in 2026. Further, we estimate NIM to be 1.12% in 2024 and 2025, with a modest expansion in 2026 to 1.15%.
Strategic Acquisitions & Restructuring: State Street’s opportunistic buyouts and restructuring efforts have been contributing to its growth. Last month, the company’s asset management unit, State Street Global Advisors, announced plans to acquire 5% of the leading Australian fintech platform, Raiz Invest Limited. This will combine the strengths of both entities and foster State Street’s investment management business.
This February, the company acquired CF Global Trading to expand outsourced trading capabilities. Also, it took ownership of its two joint ventures as part of its India-based consolidation program. These are part of the company’s ongoing efforts to optimize its global operations.
In 2021, STT acquired Mercatus to offer a fully integrated platform to institutional investors for growing private market segments.
These continuous inorganic growth efforts are expected to continue, allowing the company to reap the benefits of cost and revenue synergies and expand its footprint globally.
Improving Fee Income: STT’s ongoing efforts to boost its fee income remain encouraging. Although the company’s fee revenues declined in 2022 and 2023 due to subdued market participation, the metric witnessed 1% CAGR over the four years (2019-2023). The trend continued during the first half of 2024.
Also, the servicing assets yet to be installed at the end of the second quarter of 2024 were $2.4 trillion. The company aims to achieve servicing fee sales in the range of $350-$400 million in 2024.
State Street’s global exposure and a broad array of innovative offerings, alongside its inorganic growth strategy, will likely support fee income going forward.
Moreover, our estimates indicate total fee revenues to witness a 3.2% CAGR by 2026.
Strong Balance Sheet Position: As of June 30, 2024, the company had a total debt (comprising long-term debt, other short-term borrowings and accrued expenses and other liabilities) of $59 billion, while cash and cash equivalents, including cash and due from banks and interest-bearing deposits with banks, were $102.8 billion.
Further, the company enjoys investment grade ratings of A1/A/AA- on senior debt from Moody’s Investor Service, Standard and Poor’s and Fitch Ratings, respectively. This indicates it is well-positioned to address its near-term debt obligations driven by its consistent earnings growth and strong liquidity position.
Strong Capital Position: STT’s focus on maintaining a strong capital position will help sustain its capital distribution activities. As of June 30, 2024, its capital ratios were well above the regulatory requirements. Common Equity Tier 1 ratio and a total risk-based capital ratio were 11.2% and 15%, respectively.
The company hiked its quarterly dividend by 10% to 76 cents per share after its 2024 stress test clearance. This was the fourth consecutive 10% annual hike in dividend payout. Currently, STT has a 35% dividend payout ratio, which boosts investors’ confidence and enhances shareholder value.
Dividend Yield
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Similarly, KEY, CMA and NTRS have increased their dividends twice in the past five years.
State Street also has a share repurchase program in place. As of June 30, 2024, $4.7 million worth of shares were available under the authorization. Also, the company intends to return 80-90% of its earnings to shareholders this year.
Parting Thoughts on STT Stock
State Street’s organic and inorganic growth measures, alongside a solid balance sheet, are likely to support its financials. Moreover, the Fed’s decision to implement rate cuts will reduce funding cost pressure and improve NIM.
Given the fundamental solidity and favorable macroeconomic dynamics, the STT stock is an attractive pick for investors now.
STT currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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State Street Corporation (STT) : Free Stock Analysis Report
Comerica Incorporated (CMA) : Free Stock Analysis Report
Northern Trust Corporation (NTRS) : Free Stock Analysis Report
KeyCorp (KEY) : Free Stock Analysis Report
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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 Nasdaq, Inc.
