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State Street Is Targeting Higher Margins through Beacon

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Expense management

State Street (STT) reported a 6.7% rise in total expenses to $2.0 billion in 3Q16 compared to $1.9 billion in the previous quarter. Expenses rose 1.0% on a year-over-year basis. The company’s acquisition costs rose due to the acquisition of GE Asset Management.

In line with the State Street Beacon program, expenses continued to fall on a year-over-year basis. State Street is targeting savings of $550.0 million over the next four to five years. Those initiatives are expected to boost overall operating margins and get the company’s revenue base in order. The company reported an operating margin of 24.3% in 3Q16 and is targeting a margin of 33.0% by 2020.

State Street’s major heads of spending include compensation and employee benefits, transaction processing services, information systems and communications, occupancy, and other operating expenses.

State Street posted a net income margin of 19.8% in 2015. Let’s compare that to margins for its competitors:

  • BlackRock (BLK): 29.5%
  • JPMorgan Chase (JPM): 23.1%
  • Bank of New York Mellon (BK): 16.9%

Together, these companies form 1.8% of the SPDR S&P 500 ETF (SPY).

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Compensation, information systems

State Street’s 3Q16 compensation and employee benefits rose 2.4% to $1.0 billion compared to the previous quarter, mainly due to improved performance. However, compensation fell 3.6% on a year-over-year basis. The pressure on regulatory and compliance costs is expected to continue in 2017 but at a slower pace compared to the previous year.

State Street information systems and communications expenses rose 5.6% to $285.0 million compared to $270.0 million in 2Q16 and $265.0 million in 3Q15. Those costs rose in a bid to support new business and additional data center capacity. Occupancy expenses were $107.0 million in 3Q16, continuing on a falling trend.

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