State Street (STT)

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See all Bulls Reasons Bulls: Reasons To Buy Leader in Consolidating Investment Servicing Industry 0% agree Leader in Consolidating Investment Servicing Industry State Street is the leader in investment servicing and is gaining market share View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Fee Driven Profit Model in Uncertain Economy 0% agree Fee Driven Profit Model in Uncertain Economy Much of State Street's profits are driven by fees from asset managers. Thus, a bear market could lower profits this year. View or Edit Reason 0 votes 0% agree Legal issues 0% agree Legal issues State Street has had legal issues with investors concerning losses in its bond funds. View or Edit Reason 1 votes 0% agree Exposure to subprime. 0% agree Exposure to subprime. State Street has four Asset-Backed Commercial Paper ("ABCP") conduits with approximately $29 Bn in assets. ABCPs have plunged due to the subprime crisis. State Street also has a $6 Bn MBS portfolio that may be subject to writedowns. View or Edit Reason 1 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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State Street (NYSE: STT), a world leader in financial services, provides a full range of products and services for large pools of investment assets. The Investment Servicing division, which offers custodial and other investment services to hedge funds and institutional investors, is the largest division and has over $15 trillion under custody. Clients include mutual fund companies and other investment managers, corporations, public pension funds, unions, non-profits organizations, and families and individuals. State Street also has a large Investment Management division, State Street Global Advisors, with nearly $2 trillion under management, as well as a foreign exchange and securities lending business. The company is based in Boston, MA and has offices worldwide.

State Street faced legal troubles in early 2008 when investors sued over losses in fixed-income strategies managed by State Street Global Advisors. Plaintiffs claim that State Street did not properly communicate the investment objectives of the fund. The company set aside $618 Mm for legal expenses. The incident prompted SSgA chief William Hunt to step down. He will be replaced by James Phalen.

In February 2007, State Street announced the acquisition of Investor Financial Services, a rival investment servicing company for $4.5 Bn. State Street will benefit from Investor Financial Services' existing clients and the cost savings from staff and human capital consolidation. The acquisition will not add to State Street's operating earnings until 2009.

[edit] Trends and Forces

[edit] Exposure to Growth of Asset Management Industry

State Street has benefited from the growth in hedge funds, mutual funds, and other entities needing investment servicing. The hedge fund boom has resulted in a jump from US$40 billion in hedge fund assets under management in the late 80s to over US$650 billion AUM in 2003. Below is a breakdown of State Street's assets since 2003.

[edit] Consolidation in Investment Servicing Industry

As a leader in the securities servicing industry, State Street is poised to benefit from the increasing consolidation of the industry. Fund managers have been choosing large servicing companies over local ones; this has helped the company's market share.

[edit] Exposure to International Growth

State Street has benefited from the high growth of international markets. Over 25% of serviced and managed assets at State Street are from overseas. The company operates a global business that can withstand a slow US economy and thrive on international growth. The company has the largest global exposure among its competitors at 41% of total revenues. 32% at Bank of New York; 34% at Northern Trust.

[edit] Adverse Market Conditions May Impact Fees but Improve Forex Revenue

State Street relies on management and performance fees for revenue. Adverse market conditions in 07-08 could reduce client assets and thus State Street's fees. On the asset management side, fund performance could be negatively impacted due to weak equities.

State Street has profited from these conditions in the form of higher foreign exchange revenues and better lending spreads.

[edit] Exposure to Subprime through MBS & ABCP

As a result of the subprime crisis, there is concern about the State Street's exposure to Mortgage Backed Securities ("MBS") as well as Asset Backed Commercial Papers ("ABCP"). The company has $6 Bn in an MBS portfolio and over $29 Bn in an ABCP conduit.

It is notable that State Street's conduits have much better ratings than those of its peers.

[edit] Market Share

State Street's services are used by:

• More than 40% of US mutual funds
• 37% of US tax-exempt pension assets
• 36% of trust assets in Japan held by non-domestic banks

• No. 1 provider of U.S. mutual fund custody and accounting services
• No. 1 servicer of U.S. pension plans
• No. 1 investment manager of institutional assets worldwide
• No. 1 investment manager of U.S. institutional tax-exempt assets
• No. 3 assets under management worldwide
• Leading custodian worldwide
• Leading offshore fund service provider worldwide
• Leading provider of securities finance services worldwide

[edit] Key Facts

• State Street provides 75% of the world's larget money managers and asset owners with foreign exchange services and transition management services, and quantitative research and technology-driven tools.
  
• The company manages $2 trillion in assets worldwide; the world's largest pool of institutional assets
  ^[1]

[edit] Competition

Against most competitors, State Street has the advantage of size.

[edit] Direct Competitors

• Bank of New York Mellon Corporation (NYSE: BK)
  
• Northern Trust Corporation (NYSE:NTRS)
  

[edit] Divisions of Financial Conglomerates

• Citigroup (NYSE: C)
  
• JP Morgan Chase (NYSE: JPM)
  

Looking at P/E, State Street is priced higher relative to its direct competitors. However looking at PEG tells that the competitors are priced similarly.

BK = The Bank of New York Mellon Corporation C = Citigroup Inc. NTRS = Northern Trust Corp. Data from Yahoo! Finance

References
1. Company website, Investor Relations: Presentation to Investors and Analysts, Fourth Quarter 2007" - http://library.corporate-ir.net/library/78/782/78261/items/267083/STT_StandardPres1007.pdf
2. Company 10K

[edit] References

1. ↑ STT