道富银行

State Street reported a very strong second quarter, with 17% revenue growth and 44% adjusted earnings per share growth. State Street also introduced new medium-term (3-5 year horizon) targets.

Why it matters: While State Street beat consensus estimates, we attribute the muted reaction to the run up in State Street’s stock price and the fact that peers reported strong results making State Street’s strong results foreseeable. Across key variables, State Street continues to draw aces. Strong market valuations are boosting servicing fees (up 13%) and asset management fees (up 29%). More volatile revenue streams such as foreign-exchange trading (up 27%) and securities finance (up 19%) continue to show strong volumes. Net interest income was up 3% sequentially and 18% from the year-ago period. We note that the firm’s net interest margin of 1.13% decreased sequentially from 1.16% in the first quarter while peer BNY saw a 7 basis point rise. State Street’s deposit mix continues to shift toward interest-bearing while BNY, which has a more diversified deposit base, held that share steady.

The bottom line: As we digest these results, we expect to raise our $138 fair value estimate by a high-single-digit percentage as the firm’s net flows and management fees are coming in better than our model and the firm’s medium-term returns on tangible common equity targets are impressive. As the firm simplifies its operating model, State Street established medium-term targets of 35% and mid-20s returns on tangible common equity. Our pre-earnings model of returns settling in the 23%-24% range may have been too punitive. That said, with the stock up over 40% year-to-date, we believe the market may be too enthusiastic on the name and view shares as overvalued. We note that markets and volumes tailwinds can reverse.

Bears Say: Efficiencies, including from AI, will be competed away as State Street’s sophisticated asset owner and asset manager client base demand better pricing.

To be sure, pricing pressure has moderated in recent years, but note that pressures unexpectedly crept up in 2018 and 2019 and weighed on the stock then.

Diving deeper into the firm’s fiscal 2026 outlook, State Street expects fee revenue growth of 12%-13% (previous: 7%-9% growth) and net interest income up 14%-15% (previous: 8%-10% growth). Expenses are now expected to grow by 8% (previously 5%-6%). This outlook shows strong operative leverage, in our view.

After updating our model following the firm’s second-quarter financial results release, we are increasing our fair value estimate for State Street to $150 per share from $138 primarily due to better-than-expected management fees. We expect 2026 and 2027 fee income of $12.4 billion and $12.7 billion, respectively. We expect net interest income to increase by about 20% in 2026, but note that it can be volatile and thus difficult to forecast. Over the next three to five years, we expect the firm's NII to face pricing pressures and eventual interest rate cuts, resulting in low-single-digit growth after 2027. Our fair value estimate is approximately 2.5 times tangible book value and roughly 11 times our 2026 GAAP earnings per share estimate.

Net interest income (preprovision) declined by double digits in both 2020 and 2021 but rebounded sharply (34%) in 2022 as a result of the Federal Reserve raising interest rates. This rebound continues with 8% growth in 2023, 6% growth in 2024, and 1% growth in 2025. Fee revenue is sensitive to many factors, such as equity market movements and volatility. During our forecast period after 2026, we expect 2% to 3% fee revenue growth as asset growth is partially offset by pricing headwinds from a consolidating asset management industry. We expect State Street’s returns on tangible equity to be in the mid-20 percentages.

We believe the custody business tends to have a wide moat built on cost advantages and switching costs. State Street is roughly tied with BNY Mellon as the number-one custodian based on assets under custody and administration. Given the low basis points paid for custody services, we believe this is a business where scale matters. Both State Street and BNY Mellon each spent over $1.5 billion on technology annually in recent years, a level that smaller firms cannot match.

We believe cost advantages for large trust banks are derived primarily from scale. There are large upfront costs to develop software systems and processes to service such a large amount of assets. State Street spent $2.1 billion on information systems and communications in 2025 and about $1.05 billion on transaction processing services.

Clients of the custody banks do face switching costs due to process disruption, the interconnectedness of a client’s workflows and the custodian’s infrastructure, and onboarding costs. Custody is central to the operations of asset managers and asset owners (such as pension funds), and as a result, the decision to switch is not a light one. Switching custodians takes time; it involves integrating new systems and retraining staff. Large asset owners and asset managers may have a formal policy to conduct custody reviews after a certain number of years. In general, we point out that the decision to switch custodian often takes 6-18 months.

A very public switch among asset managers was BlackRock’s decision to transition the majority of its iShares ETF custodian from State Street to other players. In May 2020, Barron’s reported that BlackRock was looking to diversify custodians. In February 2021, State Street announced it would lose a large chunk of the iShares business (this represented about 1.5% of State Street’s fee revenue). The transition mostly occurred in late 2023, with the final transition expected to occur in 2025. We make two points. First, the transition took several years. Second, we do believe there is some truth to the idea that BlackRock wanted to diversify providers rather than only generate cost savings. BlackRock’s custody vendors went from the vast majority, State Street, to roughly 40% Citi, 30% JPMorgan, 15% BNY Mellon, and 15% State Street. We note that State Street’s SPDR business is a meaningful competitor to the iShares ETF business, unlike the other providers.

The asset management industry continues to consolidate, and both asset managers and asset owners are sophisticated about pricing. As a result, the custody business continues to see pricing pressure. Despite this pricing pressure, the firm’s returns on tangible equity have remained strong as scale and slow expense growth have offset headwinds. Moreover, market shares have been stable.

We view State Street’s investment management arm, which represents about 17% of firmwide revenue, as having a narrow moat. Switching costs and intangible assets tend to be the primary moat sources for asset managers, and we do not view State Street as an exception. Switching costs stem from inertia, the uncertainty of achieving better results at another asset manager, and the potential tax consequences of switching funds for appreciated assets. Intangible assets stem from client relationships, the breadth of State Street Global Advisors’ offerings, and its brand/reputation.

While State Street boasts $5.7 trillion in primarily passive AUM, we do not believe its scale means it has a cost advantage. State Street’s AUM is still a fraction of market leaders BlackRock (over $14 trillion in AUM) and Vanguard (over $11 trillion in AUM). In addition, the firm’s ETF business (30% of AUM and likely a greater percentage of segment revenue) is disadvantaged from a cost perspective. The SPDR trademark is owned by S&P Global, and as a result, State Street pays significantly higher license fees for use of its indexes. We also point out that State Street has been losing share in the ETF business.

With Charles River Development, State Street’s front-to-back offerings (branded as State Street Alpha) offer competitive advantages and should lead to a greater wallet share of clients and stickier client relationships.

State Street's scale may allow it to grow expenses more slowly than the market expects. This has occurred at peer BNY.

A joint venture or sale of its asset-management business could unlock value for shareholders.

Fee compression and lower margins in the asset-management industry could result in pricing pressure accelerating. Pricing pressure can also manifest itself in higher funding costs on deposits.

State Street is exposed to many factors outside its control, such as equity market movements, interest rate movements, and foreign-exchange volatility.

Despite being a first mover, State Street’s ETF business has meaningfully underperformed competitors BlackRock and Vanguard.