Skip to Content
Stock Strategist

Massive Scale Benefits State Street

Few competitors can match its profit margins or breadth of product offerings in custody.

Mentioned: ,

 State Street (STT) is one of the three largest custodian banks in the United States, built on a series of large acquisitions begun in 2003. As a dominant player with some $28 trillion in assets under custody, State Street has the scale and scope necessary to serve institutional clients, which few competitors can hope to match. Asset custody and asset servicing is a business with naturally sticky customers who are loath to risk changing providers and who value the one-stop shopping that State Street can provide. As such, it is a naturally high-return and highly scalable business. However, revenue growth has been a challenge in recent years as a result of persistently low interest rates and increasing client attention on fee levels. We expect fee levels to stabilize as the economic environment improves and investors will see the benefit of the business' operating leverage as net interest margins rise. We expect returns on equity to improve from 9.7% in 2014 to around 15% in the medium term.

The company's asset management business, about 15% of group profits, is floundering despite positive trends in passive investments, a market where it is a major player. State Street, which focuses on institutional investors and charges premium pricing, has struggled to adjust strategically as industry pricing has marched ever lower. Moreover, it is heavily concentrated in products, like its S&P 500 index, which are easily copied and vulnerable to swings in investor preferences. Recent moves, such as price cuts and acquisitions aimed at building out its portfolio of offerings, may help stem the bleeding, but we think the firm may continue to lose market share.

Stephen Ellis does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.