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State Street Corporation (STT) 2024 Q2 Earnings Call Summary

July 16, 2024 State Street Corporation (STT)

Market Cap0.21T
Beta
P/E39.75452774136047
EPS12.247158441111395
Dividend0
Dividend Yield0.00%

Optimistic Highlights

  • Strong Financial Performance: State Street reported a year-over-year increase in fee and total revenue growth for both the second quarter and the first half of the year, alongside continued expense discipline. This resulted in positive total operating leverage, a pre-tax margin of almost 29%, and a return on equity of nearly 12% in the quarter.
  • Successful Operations Consolidation: The company successfully consolidated its second operations joint venture in India, enhancing client experience and unlocking further productivity savings.
  • Significant Event Management: State Street effectively assisted clients through the transition to T+1 settlement, reinforcing its value and operational capabilities.
  • Business Momentum: The company reported AUC/A wins of $291 billion, with significant contributions from the APAC region, and servicing fee revenue wins of $72 million in the second quarter. Global Advisors' AUM reached a record $4.4 trillion.
  • Capital Return: State Street returned over $400 million of capital in the second quarter through share repurchases and dividends, with plans to increase the quarterly common stock dividend by 10%.

Pessimistic Highlights

  • Market Challenges: The financial market context in the second quarter was mixed, with fixed income markets struggling due to geopolitical risks and a more gradual cycle of rate cuts anticipated by investors.
  • Servicing Fee Revenue Impact: A previously disclosed client transition negatively impacted servicing fee revenues, contributing to a 2% year-on-year decline in servicing fees.
  • Installation Pace Below Expectations: The pace of quarterly installations for new business was slower than expected in the first and second quarters, although an increase is anticipated in future quarters.

Company Outlook

  • Improved Full Year Outlook: State Street has improved its full-year outlook, expecting total fee revenue to be up 4% to 5% and full-year NII to be up slightly year-over-year. Expenses excluding notable items are expected to be up about 3% this year. The company anticipates delivering both positive fee operating leverage and positive total operating leverage for the full year, excluding notable items.

Q & A Highlights

  • Q: Can you discuss the impact of institutional outflows at Global Advisors and expectations going forward? (Glenn Schorr, Evercore ISI)

    A: The outflows were primarily due to client rebalancing, with a significant portion from a large client moving away from certain asset classes. This is viewed as idiosyncratic and not expected to continue. State Street remains confident in the trajectory of Global Advisors. (Ron O'Hanley)

  • Q: How does State Street approach potential consolidation opportunities in services, and are there lessons learned from past experiences? (Glenn Schorr, Evercore ISI)

    A: State Street's focus is on organic growth and returning capital to shareholders. M&A can be considered if it effectively implements strategy and is superior to returning capital. The company has a strong market position and continues to build out organically. (Ron O'Hanley)

  • Q: What are the expectations for NII in the second half, considering the strong second quarter? (Ken Usdin, Jefferies)

    A: While the second quarter NII was strong, some headwinds and tailwinds are expected to continue, with a potential for NII to stabilize and then improve in the next few quarters. Deposits have stabilized, and management actions to support NII growth will continue. (Eric Aboaf)

  • Q: Can you provide more details on the expected improvement in core fees growth? (Ken Usdin, Jefferies)

    A: Improvements are expected from retention, an increase in the rate of onboarding, and new business sales. The pipeline is strong, and the company is on track to meet its increased servicing fee revenue sales goal. The deconversion impact is also nearing its end. (Ron O'Hanley)

  • Q: What factors are contributing to the low volatility in FX trading, and what could drive volatility higher? (Gerard Cassidy, RBC)

    A: The strength of the dollar and a lack of speculative activity in currency markets have contributed to low volatility. Clients are overweight in cash and underweight in equities and bonds, leading to more natural and transitional flows rather than speculative ones. (Ron O'Hanley and Eric Aboaf)

View original State Street Corporation earnings transcript →

Company key drivers

Note: all the quotes from earning call transcript

Driver 5: Alpha and Private Markets Mandates

Alpha and private markets mandates are strategic growth areas that enhance State Street's competitive advantage and drive future revenue.

Driver 6: Global Advisors Management Fees

Management fees from Global Advisors are a significant revenue stream, and their growth is essential for overall financial performance.