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Morningstar | State Street a Wide Moat Company But Revenue Headwinds Persist

With over $31 trillion in assets under custody or administration, State Street is essentially tied with BNY Mellon as the largest custodian by assets. State Street’s clients include asset managers, asset owners, and corporations. State Street provides a range of asset servicing and ancillary servicing including maintaining custody of assets, fund administration, record-keeping, securities lending, ETF servicing, foreign exchange trading services, and other services. State Street is also one of the largest global asset managers, with over $2.5 trillion in primarily passive assets under management. While State Street has a market-leading position in custody and is a formidable presence in the ETF space, revenue growth has been a challenge. Pricing pressure on the firm’s clients have resulted in fee compression, and State Street has seen fee pressure of 1%-4% over the last five years. In addition, clients becoming more discerning about its deposits has limited the amount of net interest margin expansion and has resulted in a smaller balance sheet. With the acquisition of Charles River Development in 2018, State Street is emphasizing that it now has an integrated “front to back” platform, which it believes will lead to stickier, high-revenue-generating customer relationships. State Street’s back-office offerings include custody, fund accounting, and fund administration. Its middle office includes client reporting, post-trade workflows, investment risk monitoring, and performance/attribution analysis. State Street’s front office includes Charles River’s portfolio modeling and data management software as well as legacy State Street’s foreign exchange trading and securities finance solutions.With increasing client concentration and continued pressure on asset managers, we expect pricing will continue to be a headwind to State Street’s revenue growth. We expect some of the firm’s expense initiatives to help offset this pressure. Overall, we expect the firm’s return on tangible equity to be flat or modestly lower over the next five years in the midteens percentages.