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Morningstar | Industry Headwinds Are Pushing Against State Street

State Street is one of the two largest custodian banks in the world, with over $33 trillion in assets under custody and administration. State Street is involved within the investment life cycle at nearly every step of the way, serving corporations, investors, and institutions. This includes maintaining custody of assets, record keeping, back-office services for asset managers, ETF servicing, and more. State Street is also one of the five largest global asset managers. This has been driven by overall strength within their asset management segment,particularly within the ETF space.While State Street is a strong player in many of their markets, revenue growth has been a challenge in recent years as a result of persistently low interest rates and increasing client attention on fees. On the custody side of the business, we expect fees to stabilize as the economic environment improves and demand for ancillary services increases. We also like State Street’s increasing focus of further back end automation, and increasing the value add of many of their products as they build out more data driven offerings. We believe the firm’s investment in technology over the years positions them well in this regard.The asset management business is another story, with increased transparency around fees and the growing acceptance of low-cost investing all putting fees and performance under a microscope. State Street's asset management operations focus primarily on institutional investors and tend to charge premium pricing, and the firm has struggled to adjust strategically as industry pricing has marched ever lower. Moreover, it is heavily concentrated in products, like the SPDR S&P 500 ETF. We think State Street will continue to lose share among investors to whom price is paramount but should stem outflows from those willing to pay a premium for liquidity and product breadth.With the headwinds facing the industry, we expect minimal margin expansion over the medium term. We expect some of the firm's current initiatives to help balance out existing pressures, although we project a small decline in the returns on equity over the next five years.