State Street Corporation (NYSE:STT) is a trust bank which provides securities services to institutional investors and back end services to investment managers. It has performed well among its peers despite the financial slowdown. It passed the Fed stress test and boasts of higher returns. Investors looking for a dependable stock in the financial sector can surely bank on this company.
Trust banks and revenue generation
Trust banks are different from other commercial big shot banks in a sense that they do very little lending, thus having minimum exposure to credit risk. Mostly, they generate fee-based income compared to more of fund-based income by commercial banks.
State Street generates more than four-fifth of its revenue from asset servicing services and has a good rapport with its clients. According to the 2012 earnings call, State Street Corporation (NYSE:STT) has a retention ratio of 80% of its clients over the past decade. This scores well with a trust bank in a world where investment managers are increasingly trying to save on costs and focusing on their core competency, which is investing.
State Street’s financial performance has been very impressive over the years. It has the highest return on equity (ROE) among its peers. The 52-week return has been a tremendous 63% compared to the S&P index’s return of 26%. In its most recent quarter, revenue of State Street Corporation (NYSE:STT) was slightly low at $2.47 billion, however, its adjusted operating EPS of $0.96 exceeded analysts’ estimates by $0.03.
The most important parameter which defines the bank is its liquidity scenario. With a market cap of $30 billion, State Street has total cash of $58 billion. That means that the bank is standing at a comparatively risk free position with minimum credit exposure. State Street passed the Fed’s 2012 CCAR stress tests with the capital adequacy ratio lying within a comfortable range. As a result of this, it was allowed to buy back $1.8 billion worth of shares, higher than its peers. All in all, State Street Corporation (NYSE:STT) offers a better risk adjusted investment opportunity in the financial services industry.