Custody assets hit a record $59.2 trillion and net interest income rose 21%. But revenue of about $4.0 billion came in below FMP's $4.03 billion consensus and dipped from the prior quarter, and the company's guidance assumes markets stay flat.
State Street's third quarter produced records in almost every line investors watch, and one decline that may matter more than all of them.
The custody bank reported earnings of $3.69 a share, a cent above FMP's $3.68 consensus. Revenue rose 13% from a year earlier to about $4.0 billion, short of the $4.03 billion analysts expected, according to FMP. Assets under custody and administration reached a record $59.2 trillion, and assets under management stood at $6.3 trillion.
The stock fell as much as 10% from Tuesday's close and was down about 6.3% at $163.19 by about 1:45 p.m. Eastern.
The records
Servicing fees, the core custody business, reached a record $1.49 billion, up about 10%. Management fees hit a record $797 million, up 20%. Foreign exchange trading revenue rose 17% to $427 million, and net interest income climbed 21% to $864 million on a wider net interest margin. New servicing fee wins totaled $68 million.
Costs grew more slowly than revenue. Expenses of $2.6 billion rose 8%, and the pre-tax margin widened to 34.6% from 31.1% a year earlier. The company returned $651 million to shareholders.
State Street raised its full-year guidance. It now expects fee revenue to grow about 13% to 14% this year, up from 12% to 13%, and net interest income to rise about 15% to 16%, up from 14% to 15%. It now expects expenses to grow about 8% to 8.5%.
The decline
Total revenue fell about 1% from the second quarter, and fee revenue slipped from June as well. Foreign exchange revenue dropped from the prior quarter, which the company attributed to a lower mix of emerging markets business.
That sequential softness matters because most of State Street's fees are a percentage of the assets it holds or manages. When markets rise, fees rise with them. The company's outlook assumes global equity markets stay flat from current levels, which means the raised guidance leans on client wins and interest income rather than further help from asset prices. On Wednesday, with the S&P 500 down more than 1% by early afternoon, that assumption looked less comfortable.
The rate split
Wednesday's inflation report sharpened a tension inside State Street's results. Net interest income, which benefits when rates stay high, rose 21% and now makes up about 21.6% of revenue, up from roughly 20% a year ago by our calculation. Fee revenue, which depends on the value of client assets, grew about half as fast and slipped from June. A Fed that raises rates again would likely support the first line and pressure the second, so the mix of the two, not either one alone, will decide how the year finishes.
A divergence with BlackRock
BlackRock, which also reported Wednesday, beat revenue estimates and was roughly flat by early afternoon. State Street, which edged past earnings estimates, narrowly missed on revenue and raised its guidance, fell several times as far. One possible explanation is that investors are paying more attention to revenue momentum from quarter to quarter than to annual growth rates or records.
Market implications
The bullish case is that State Street is executing: margin is approaching the mid-30s, interest income is strong and guidance went up. The bearish case is that a business tied to asset values has just shown flat-to-lower revenue in a quarter when markets were supportive, and the outlook now depends on markets holding steady.
What to watch
Fourth-quarter fee revenue against this quarter's $3.14 billion, BNY's results on Thursday for a read on the custody industry, and whether equity markets hold the levels State Street's guidance assumes.