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    State Street Corp (STT)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$74.31Last close (Jan 18, 2024)
    Post-Earnings Price$79.90Open (Jan 19, 2024)
    Price Change
    $5.59(+7.52%)

    What went well

    • Strong capital return with new $5 billion share repurchase program: State Street announced a new common share purchase program of up to $5 billion with no expiration date, demonstrating commitment to shareholder returns.
    • Optimistic about lower RWA increases due to Basel III: Management believes that regulatory capital increases may be smaller than initially estimated, which could alleviate capital pressures and support future growth.
    • Anticipated fee revenue growth of 3% to 4% in 2024: State Street expects full-year total fee revenue to be up approximately 3% to 4%, driven by servicing fee and management fee growth and continued strong growth in Front Office Software and Data.

    What went wrong

    • Regulatory uncertainty regarding Basel III reforms could lead to increased capital requirements for State Street, impacting their capital return plans and profitability. Management noted a potential Basel RWA increase of about 15%, but the exact impact remains uncertain due to ongoing regulatory discussions.
    • Challenging fee revenue growth outlook, as State Street has historically struggled to meet or exceed guidance without significant equity market gains. With a conservative market assumption, there is a risk they may not achieve the 3% to 4% fee revenue growth target for the year.
    • Expected decline in Net Interest Income (NII) due to projected interest rate cuts and changes in deposit mix. Management anticipates NII to be down about 10% year-over-year, with uncertainty around the exact impact and timing, which could negatively affect profitability.

    Q&A Summary

    1. NII Guidance and Deposits Outlook
      Q: What drove Q4 deposit upside? Where will balances stabilize?
      A: Deposits have been volatile but surprised to the upside in Q4 due to client engagement and market factors. We expect to operate in the $200–$210 billion deposit range throughout 2024 , with noninterest-bearing deposits continuing to decline. NII is guided to be flat to down 3% in Q1 , trending down but stabilizing around $550–$600 million by Q3.

    2. Deposit Betas in Rate Cuts
      Q: How will deposit betas behave in a rate-cutting cycle?
      A: As rates fall, deposit betas will reverse with some symmetry over multiple quarters. Our U.S. cumulative betas are around 75%, euros at 60%, and pound sterling at 30–35%. Many deposits are indexed to market indicators, so adjustments will occur naturally.

    3. Fee Income Growth and Guidance
      Q: Can you detail fee growth across different lines for the 3–4% guide?
      A: Asset Management fees will be higher, driven by equity markets and flows. Software and data processing are expected to grow at high single digits. Servicing fees will be below 3–4% due to a client transition impacting growth. Market activities should be somewhere in the middle.

    4. Large Client Transition Timing
      Q: What's the timing of the large client transition affecting fees?
      A: We're about halfway through the transition on a quarterly run-rate basis. Approximately half of the impact will occur in 2024, with another quarter in 2025. This headwind is included in our Q1 2024 guidance.

    5. Buyback Plans and Basel III Impact
      Q: How does Basel III affect your $5B buyback plan?
      A: The outcome of Basel III is uncertain. Under the current proposal, our RWA could increase by about 15%, but we expect the actual impact to be less. We didn't adjust our buyback authorization based on Basel III uncertainty.

    6. NII Stabilization and Rate Cuts
      Q: Will NII stabilize only after Fed stops cutting rates?
      A: Noninterest-bearing deposits should stabilize by mid to late 2024. Deposit betas tend to stabilize then as well. NII will depend on interest rates, but we may see stabilization in the second half of the year.

    7. Securities Portfolio Repositioning
      Q: Will you reposition the securities portfolio to enhance NII?
      A: We continue to evaluate opportunities to reposition the portfolio. If rates are at attractive levels, we may take action similar to last year's profitable repositioning.

    8. Capital and RWA Dynamics
      Q: What drove the RWA optimization, and will RWA rise in 2024?
      A: RWA volatility is due to market factors affecting exposures. We ended Q4 particularly low at $112B RWA. RWA may be $118–$120B going forward, and we'll add $3–$5B of RWA each year to support business growth.

    9. Growth in Private Markets Servicing
      Q: Discuss your growth in private markets servicing wins.
      A: We've invested in this space and see secular growth trends. Fees are higher but recognized as funds are fully invested. Private markets have grown 10–15%, and we expect over 15% revenue growth in this area.

    10. Bitcoin ETFs and Digital Assets
      Q: Did you secure servicing for new Bitcoin ETFs?
      A: We service three of the eleven Bitcoin ETFs launched. We're active in the digital assets space and continue to participate in its growth.

    11. Capacity Constraints in Alpha Product
      Q: Are there capacity constraints in your Alpha platform?
      A: The main constraint has been onboarding complex clients. We've improved onboarding, reducing assets to be onboarded from $3.6T to $2.3T.

    12. Cash Inflows and Money Markets
      Q: How will money fund assets trend as rates decline?
      A: Institutional investors tend to hang on to money market funds. We expect to retain clients, though balances may adjust if there's a risk-on shift.

    13. Fee Operating Leverage and Expenses
      Q: How will you manage expenses if fee revenue changes?
      A: If fees rise, most would drop to the bottom line. If fees fall, we'd aim to preserve investments but could adjust BAU expenses and defer lower-priority projects.

    14. Servicing Fee Wins Outside Private Markets
      Q: Where else are you seeing servicing fee growth?
      A: Growth in core Investment Managers and asset owners. Regional focus has led to strong growth in Asia-Pacific and improved performance in the U.S..

    15. NII Volatility Due to Fed Actions
      Q: Can NII become more predictable amid bond market volatility?
      A: Predictability is linked to Fed actions. Matching deposit and asset characteristics helps, but some NII volatility is inherent.

    16. SSGA ETF Flows and Sustainability
      Q: Are recent SSGA ETF flows sustainable?
      A: Flows increased due to a risk-on environment and focus on intermediary channels. Growth in low-cost, fixed income, and active ETFs is expected to continue.

    17. Regulatory Commentary on Index Funds
      Q: Thoughts on FDIC's regulatory comments on index funds?
      A: We're not familiar with the FDIC's specific commentary on index funds.

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