Boston’s State Street — a provider of financial services to institutional investors — was founded in 1792.
Not surprisingly, information technology has been essential to its ability to serve customers — including its State Street Alpha platform which helps institutional investors manage their investments.
After a June 20 interview with State Street executives, I learned that generative AI could revolutionize how it operates in the years ahead. With its shares trading 34% below their January 2018 high, I wonder whether Generative AI could help propel them further upward.
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State Street’s Business And Financial Performance
State Street provides record-keeping and administrative services to large money managers and runs its own investing arm. Services include “maintaining custody of assets, fund administration, record-keeping, securities lending, foreign-exchange trading services, and data services to institutional asset owners and asset managers,” according to Morningstar
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Equity Analyst Rajiv Bhatia.
These industries were not doing well in the first quarter. As of April 17, when the firm reported first quarter results, State Street’s businesses were muddling through a rocky year for markets due to rising interest rates, inflation and investor concerns with the U.S. banking system, the Wall Street Journal noted.
State Street’s quarterly profit fell short of analysts’ expectations while its revenue came close to them. Its net income fell 9% to $549 million, or $1.52 a share — 11 cents below the forecast of analysts polled by S&P Global Intelligence. State Street’s revenue rose 1% to $3.1 billion — about $30 million short of estimates.
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The Journal noted the market’s selloff “cut into the fees the custody bank collects on safeguarding and managing clients’ assets” by 9% to $2.34 billion.
State Street expressed optimism. Ron O’Hanley, State Street’s chairman and CEO said in a statement, “Our first-quarter results reflect the resiliency of our business model, notwithstanding continued interest rate increases and subsequent significant market movements, volatility and disruption within other parts of the banking industry.”
O’Hanley expressed pride in the firm’s revenue durability — noting that its strong net interest income growth offset “fee revenue headwinds” resulting from “significantly lower average market levels.”
Between April 17 and June 20, the price of State Street shares was roughly unchanged.
State Street Alpha
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State Street’s institutional investor clients need accurate, detailed, and timely information about their investment holdings. The State Street Alpha platform delivers that with a boost from Microsoft’s
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Azure cloud service and Snowflake’s
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data management platform, according to my June 20 interview with State Street executive vice president, John Plansky.
State Street’s customers include global institutional investors such as investment managers, insurance companies, private equity firms, and hedge funds.
Three forces drove State Street’s decision to build the Atlas platform:
- Demand for front-office functions. Clients wanted State Street to provide front-office trading services so it entered commercial software by acquiring Charles River Development for $2.6 billion in 2018.
- Need for better portfolio management. At the industry level, investment data for client reporting, risk analysis, and regulatory reporting was not being managed well
- Desire to make data available to State Street clients. There was a need to integrate State Street’s data into a data platform and make it available and meaningful to clients, Plansky explained.
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Through Alpha, State Street aimed to solve a problem that caused clients significant pain. There was a “wide cross section of data — including front-to-back-end services, market data, pricing, reference data, and ESG data — from different categories that clients needed” to do their jobs effectively, said Jeffrey Shortis, State Street Alpha Data Platform Product Owner, in a June 20 interview.
Snowflake helped State Street bring together all the data into a natural language question and answer solution. “We were able to aggregate content at scale, integrate it with a large language model, make it available in a secure way, and remove friction for clients to get access to proprietary and publicly-available market data,” Shortis said.
Clients particularly appreciate Alpha’s ability to answer their questions more quickly. As Plansky told me, clients formerly needed to wait to get information about their portfolio until the next trading day. “Now, we can make information available to them in near-real-time.”
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This gives clients faster answers to questions such as:
- Why did my portfolio decline in value?
- What are the top 10 news events impacting my portfolio?
- Why were there errors with certain types of trades?
- What could happen to move the portfolio by 1%?
- What is the current performance of the portfolio?
- What happens to my portfolio if, say, First Republic goes under?
Generative AI In State Street’s Future
Having written about the generative AI ecosystem, I asked whether State Street sees LLMs as creating significant business value. “I am on the executive board which has been asking about generative AI. What triggered their interest was Microsoft’s $10 billion investment in OpenAI” announced in January 2023, Plansky said.
State Street sees breakthrough potential to use generative AI to save time. “We have 40,000 knowledge workers who look up answers to questions about why something broke and how to fix it. How much of their time could be saved in that activity if they had the right large language model? Boosting productivity is the name of the game,” he said.
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Should you buy its stock? TipRanks reported State Street shares could rise nearly 14% to reach the $83.18 average price target of 15 analysts who issued 12-month price targets.
State Street clients have negotiated lower fees for custodial services over the last five years. Despite its market leadership, clients have been winning fee concessions. The asset manager’s fees fell 4% in 2018 and 2019 and declined a more modest 2% in 2020 and 2021, Bhatia wrote in January. Higher interest rates boosted State Street’s net interest income — which accounts for a quarter of its revenue, he wrote.
If State Street can use generative AI to cut more cost and boost productivity, its profitability could increase and it might be able to reduce its custodial fees enough to win more market share.
Read the full article here