State Street’s stock (NYSE: STT) , a company that provides a variety of financial services to institutional investors, posted a better-than-expected set of Q4 2024 results. The stock has gained about 30% since early 2024, marginally ahead of the S&P 500, although it considerably underperformed rival Bank of New York Mellon stock, which remains up by over 60% over the same period. So what are some of the trends that have been driving STT stock.
Total revenue stood at $3.4 billion, up 12% versus last year with earnings coming in at $2.46 per share. Revenue increased by 12% year-over-year, with fee revenue up by 13% and net interest income rising by 10%. The company’s assets under management increased by 15% year-over-year to $4.71 trillion led by higher market levels and quarterly net inflows. Assets under custody also rose by 11% to $46.6 trillion. The company also saw its net interest income rise by 10%, driven by higher investment securities yields and double-digit loan growth rates, although a shift in the deposit mix partly offset this. State Street’s margins have also been picking up. Adjusted Pre-tax margins rose to 29.8%, up almost 280 basis points compared to last year. While the company has been streamlining its operations to cut costs while focusing on higher-margin businesses, custody banks benefit from operating leverage due to their relatively high fixed-cost structure, with revenues growing quicker compared to total costs over the last quarter. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
The increase in STT stock over the last 4-year period has been far from consistent and has largely been as volatile as the S&P 500. Returns for the stock were 31% in 2021, -14% in 2022, 4% in 2023, and 30% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could STT face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
The markets have generally been bullish post the U.S. election, with Donald Trump assuming the presidency for a second term. Investors are betting that the Trump administration’s focus on deregulation could translate into a more lenient approach to financial oversight than the Biden administration. This could help banks such as STT by lowering compliance costs and boosting profitability. Moreover, higher potential economic growth should bode well for asset prices, helping custody banks like State Street. Trump has also favored tax cuts, which could also help the bottom lines of banks. Separately, the end of quantitative tightening by the U.S. Fed also helps STT, as liquidity in the system could improve with institutions having more funds to park with custody banks. At the same time, asset prices and investing activity could also pick up as interest rates ease. We value STT stock at about $90 per share, slightly below the current market price. See our analysis of State Street’s valuation for more details.
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