Rising Market Momentum And Fee Expansion Will Drive Future Asset Servicing Success

Key Takeaways

• Growth in assets, fee revenue, and ETF strength positions State Street to capture wealth and retirement flows for sustained expansion.
  
• Strategic investments in technology and operational efficiencies are driving cost savings, margin improvement, and deeper client relationships.
  
• Rapid fintech innovation, fee pressure, regulatory demands, and shifts in settlement technology threaten State Street's revenue growth, market share, and capital flexibility if adaptation lags.

Catalysts

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

• State Street is experiencing robust growth in global assets under custody/administration and assets under management, driven by strong new business wins, record net inflows-especially in ETFs and U.S. defined contribution channels-and fee revenue growth across core franchises, positioning the company to capture a greater share of rising global wealth and retirement savings, which should support sustained revenue and earnings expansion.
  
• The acceleration of passive and ETF investing continues to benefit State Street's leading SPDR ETF franchise, as evidenced by significant inflows, expanding market share in low-cost products, and record trading volumes, which are expected to drive increased recurring management fees and higher operating margins over time.
  
• Ongoing investment in technology, data analytics, automation, and the expansion of the Alpha platform are enabling higher productivity, deeper client engagement, and scalable solutions-leading to operational efficiencies, cost savings, and improving net margins, evidenced by over $1 billion of expense savings with a further $500 million targeted by year-end.
  
• The increasing complexity of global and cross-border investments, coupled with market volatility, is boosting demand for State Street's scale, expertise, and ability to deliver end-to-end servicing, trading, and compliance solutions, anchoring recurring servicing fees and creating opportunities to grow revenue through both new and deeper client relationships.
  
• Capital management discipline, including ongoing share repurchases and an 11% increase in dividends following strong stress test results, is likely to underpin continued EPS growth and support long-term shareholder returns.

State Street Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming State Street's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.8% today to 23.6% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $12.39) by about September 2028, up from $2.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 12.1x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.7x.
• Analysts expect the number of shares outstanding to decline by 3.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.73%, as per the Simply Wall St company report.

State Street Future Earnings Per Share Growth

Risks

• Accelerating adoption of blockchain and tokenization for settlement is acknowledged as a transformative trend with the potential to reduce demand for traditional custody and asset servicing, risking State Street's long-term relevance and revenue streams should the company fail to adequately adapt.
  
• Ongoing fee compression, especially in passive and ETF investing, poses a significant challenge to management fee growth even as State Street gains market share, pressuring net margins and long-term earnings.
  
• Prolonged or accelerating declines in global and regional interest rates, coupled with continued client migration toward lower spread and noninterest-bearing deposit products, would further erode net interest income, which is already being guided as flat to declining, limiting earnings growth.
  
• Increasing regulatory pressures and the risk of higher capital requirements, especially around Tier 1 leverage ratios and risk-weighted assets, constrain share repurchase flexibility and could elevate compliance costs, impacting total capital returns and operating expenses.
  
• Intensifying competition from fintechs, big tech, and outsourced technology vendors-especially in software/platform solutions-threatens State Street's market share, pricing power, and recurring fee revenue, while gaps in tech innovation or failed execution in platform integration could lead to higher expenses and lower net margins.

Valuation

• The analysts have a consensus price target of $115.607 for State Street based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $131.0, and the most bearish reporting a price target of just $95.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.7 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 9.7%.
• Given the current share price of $112.05, the analyst price target of $115.61 is 3.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.