State Street Stock Is Undervalued

State Street’s stock (NYSE: STT) has lost 7% YTD, as compared to the 11% rise in the S&P500 over the same period. Further, the stock is currently trading at $72 per share, which is 15% below its fair value of $85 – Trefis’ estimate for State Street’s valuation. The custody banking giant missed the consensus estimates in the first quarter of 2023. It posted total revenues of $3.1 billion – marginally above the year-ago period. While the net interest income improved by 50% y-o-y driven by a higher net interest margin, it was offset by a 9% drop in the total fee revenues. The total fee income suffered due to lower servicing fees, management fees, and foreign exchange trading services. Notably, Assets under Custody & ministration (AuC/A) and Assets under Management (AuM) were $37.6 trillion (down 10% y-o-y) and $3.6 trillion (down 10%) respectively at quarter-end. On the cost front, total expenses as a % of revenues increased in Q1, leading to an adjusted net income of $525 million – down 10% y-o-y.

The bank’s top line increased 1% y-o-y to $12.15 billion in FY 2022. It was due to a 34% growth in net interest income, almost offset by a 4% decrease in total fee income. Notably, total fee income contributes close to 80% of the top line. Altogether, the adjusted net income increased by 3% y-o-y to $2.66 billion.

Moving forward, we expect the Q2 results to follow the same trend as the first quarter. Overall, State Street’s revenues are forecast to remain around $12.41 billion in FY2023. ditionally, STT’s adjusted net income margin is likely to remain around the same level as the previous year, leading to an adjusted net income of $2.70 billion and an annual GAAP EPS of $7.65. This coupled with a P/E multiple of just above 11x will lead to a valuation of $85.

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