Fee Business And Private Markets Will Unlock New Opportunities

Key Takeaways

• State Street aims for sustained fee revenue growth through product innovation, client relationship expansion, and a strategic focus on its Alpha platform.
  
• The company targets growth in private markets lending and alternative investment servicing to boost fee income and net interest from an expanding deposit base.
  
• Reliance on noninterest-bearing deposits and fee-based business challenges may pressure State Street's revenue, amid rate sensitivity and global competition.

Catalysts

Through its subsidiaries, provides a range of financial products and services to institutional investors worldwide.

• State Street anticipates continued long-term growth in its fee business through product innovation and expanding client relationships, which should positively impact revenue as it has shown in prior years.
  
• The company plans to continue its significant loan growth specifically in the private markets, which can drive sustained fee income and bolster net interest income by expanding its client offerings.
  
• It has targeted double-digit growth in alternative investment servicing, which implies increased revenue potential from its private markets segment.
  
• State Street's strategic focus on its Alpha platform to win new business and cross-sell additional services is expected to strengthen fee revenue while increasing client retention due to broader service dependencies.
  
• A strong pipeline of deposits with expected growth is likely to contribute positively to net interest income, especially with the company leveraging its established client relationships to manage and expand its deposit base effectively.

State Street Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on State Street compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming State Street's revenue will grow by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 19.2% today to 20.6% in 3 years time.
• The bullish analysts expect earnings to reach $3.0 billion (and earnings per share of $11.85) by about April 2028, up from $2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 9.5x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 4.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

State Street Future Earnings Per Share Growth

Risks

• State Street's reliance on noninterest-bearing deposits, which have been trending lower, could put pressure on their net interest income if deposits continue to decline or interest rates shift unfavorably.
  
• Changes in global interest rates, particularly in the euro or sterling, could significantly affect State Street's earnings due to its asset sensitivity to non-U.S. currencies, impacting net margins.
  
• The company faces fee compression in its fee-based businesses, which requires sustained improvement in service quality and innovation to maintain revenue growth.
  
• Increased competition in capturing alternative and private markets may impact servicing fee revenue growth targets if State Street cannot maintain its positioning.
  
• Potential regulatory changes or the implementation of Basel III could affect the company's ability to expand its loan portfolio to support its private markets clients, influencing revenue and earnings growth.

Valuation

• The assumed bullish price target for State Street is $116.4, which represents one standard deviation above the consensus price target of $103.5. This valuation is based on what can be assumed as the expectations of State Street's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $127.0, and the most bearish reporting a price target of just $78.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $14.7 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 8.5%.
• Given the current share price of $81.4, the bullish analyst price target of $116.4 is 30.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.