State Street touts selection by Treasury, $1B cost-cut plan

• Key takeaway: The firm’s executives said “Trump accounts” introduce a new generation of investors to State Street Investment Management and “reinforce” the firm’s position in the “growing U.S. wealth market.”
• Expert quote: “These accounts are designed to make investing simple and accessible, giving children a straightforward opportunity to begin early in life as asset owners.” — CEO Ronald O’Hanley
  Supporting data: State Street reported second-quarter revenue of $4 billion, up 17% from a year earlier. Fee revenue increased 17% to $3.2 billion and was the largest contributor to overall revenue growth.

State Street executives on Thursday touted the Treasury Department’s selection of one of the firm’s investment funds as the default investment option for “Trump accounts.”

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The program could introduce a new generation of investors to State Street Investment Management and “reinforce” the firm’s position in the “growing U.S. wealth market,” Chief Financial Officer John Woods said during the company’s second-quarter earnings call.

The Treasury-administered program, established under the Working Families Tax Cut Act and launched in July, is designed to give children younger than 18 access to tax-advantaged investment accounts. 

“These accounts are designed to make investing simple and accessible, giving children a straightforward opportunity to begin early in life as asset owners, benefit from the power of compounding and stay invested over time to build wealth,” State Street CEO Ronald O’Hanley said.

The Treasury has also selected The Bank of New York Mellon as the program’s “financial agent,” tasked with managing the initial accounts, and also with developing and operating an online application that families can use to access the funds..

Cost-cutting plan

Also during Thursday’s call with analysts, State Street executives outlined a plan to reduce the company’s annual costs by about $1 billion through restructuring efforts and the expanded use of artificial intelligence. The company plans to reorganize its business technology and operations teams, a move Woods said will “flow through to headcount.”

The restructuring could result in one-time severance costs totaling about $500 million, Woods said, reflecting the potential scale of gross headcount reductions.

State Street reported second-quarter revenue of $4 billion, up 17% from a year earlier. Fee revenue also increased 17%, to $3.2 billion, and was the largest contributor to overall revenue growth.

Servicing fees rose 13% from a year earlier, while management fees increased 29%, driven by higher average market levels and quarterly net inflows of $114 billion. Foreign exchange trading revenue increased 26%, primarily due to higher client volumes, particularly in the Asia-Pacific region.

Net interest income rose 18% to $860 million, helped by a 17-basis-point increase in net interest margin, which measures the difference between the interest a bank earns on assets and pays on deposits.

Total expenses increased to $2.7 billion, up 5% from a year earlier, driven by higher revenue-related costs and strategic investments.

Compensation and employee benefits totaled $1.29 billion, up 9% after excluding notable items, due to higher performance-based incentive compensation, merit increases and employee benefit costs. The company noted that its headcount declined during the period.

State Street spent $589 million during the second quarter on information systems and communications, including infrastructure investments and technology modernization. Other expenses totaled $402 million, up 11%, reflecting higher fund marketing costs.

Looking ahead, State Street plans to launch a tokenized fund servicing capability by the end of the year, subject to regulatory approval, O’Hanley said. He added that the firm’s Street Smart platform was selected by a European asset manager to support tokenized money market funds.

The firm’s long-term financial goals include raising its pre-tax profit margin to 35% and increasing its return on tangible common equity to the mid-20% range. Woods said the company wants to grow its revenue and become more efficient across all parts of its business, especially investment services, investment management and markets.

“Our key growth priorities include extending our ETF servicing leadership, broadening our reach across key international markets, expanding adoption of our differentiated alpha front-to-back capabilities, and capturing growth across alternatives, digital assets, and wealth servicing,” said Woods. “We also expect continued support from net interest income, which remains closely tied to the client deposit growth and underlying strength of our servicing business.”