One of the largest investment companies and the second oldest of the current US banks, State Street Corporation (STT) reported for the fourth quarter of 2021 an increase in diluted earnings per share by 28% YoY, to $1.78, with a consensus of $1.88. The issuer's net profit increased by 29.8% and reached $697 million, as operating expenses increased by only 2% YoY, to $2.33 billion. As of the end of 2021, the volume of assets under management was $4.1 trillion, $43.68 trillion of assets were stored in the bank's depositories.
STT's net revenue for the fourth quarter increased by 4.6% YoY, reaching $3.05 billion with a market-wide forecast of $3.01 billion. Net interest income decreased by 3%, to $484 million, due to a decrease in the interest margin (net) by 11 basis points, to 0.73%, in conditions of low interest rates. At the same time, STT is gradually expanding its loan portfolio, which increased by 16.5% YoY to $32.4 billion, but still accounts for a small share of the company's total assets (10.3%). According to our expectations, a further increase in interest rates in 2022 may contribute to improving net interest marginality and restoring the indicator to 2019 levels. STT management predicts an increase in net interest income by 10-12% in the next fiscal year.
Non-interest income increased by 3.9% YoY, to $2.5 billion, mainly due to an increase in income from investment services. The commission fee for index maintenance (Servicing Fees) increased by 5.9% YoY, to $1.38 billion, for asset management (Management Fees) — by 7.5% YoY, to $530 million, against the background of the growth of quotations of the broad market and the expansion of the asset base under management (+7% QoQ, +19% YoY).
Pressure on non-interest income was exerted by a decrease in income from foreign exchange trading services by 7.4% YoY, to $300 million, which is associated with a decrease in volatility in the foreign exchange markets. Revenues of Software solutions (Software and processing fees) also decreased by 4.4% YoY, to $195 million, which is mainly due to low market adjustments, but the segment was supported by higher revenues of the Charles River subsidiary, which provides specialized software for investment companies.
The basic equity capital adequacy ratio (CET1) increased by 1.9%, to 14.2%, due to the additional issue of shares to finance the purchase of the investor services division of Brown Brothers Harriman (BBH) Investor Services for $3.5 billion. The deal will expand STT's investment business and increase the volume of assets in trust management (under custody) by $5.4 trillion, which will make the bank one of the largest providers of custodial services.
In 2022, the main risk for STT remains a possible correction of the broad market, which may negatively affect the bank's financial results in the event of a revaluation of assets. According to management forecasts, the rate of increase in non-interest income in 2022 will be 3-4% against the background of the termination of the period of market growth and normalization of volatility in the currency exchange segment.
Considering that the State Street Corporation shares still have growth potential, we set the base target for the paper on the horizon of the year at $115. In our opinion, STT shares are undervalued and worth buying. If a bearish trend develops, STT quotes will not exceed $100. If an optimistic scenario is realized, the stock can rise in price to $ 124.