UPDATE: State Street Shares Cut In Half After Company Outlines New Risks
January 20 2009 - 11:34AM
Dow Jones News
By John Spence
BOSTON (Dow Jones) -- State Street Corp.'s stock was down 50% on
Tuesday on concerns the company may have to bring troubled
investment vehicles onto its balance sheet, a move that could force
it to raise capital and potentially dilute shareholders.
The financial-services firm reported sharply lower
fourth-quarter earnings and updated its risk factor disclosures in
a regulatory filing.
State Street (STT) shares were under pressure after the
Boston-based company said its quarterly net income fell 71% from
the year-ago period to $65 million, or 15 cents a share. Analysts
surveyed by Thomson Reuters had forecast profit of $1.14 a share,
on average.
Reflecting "ongoing illiquidity in the markets," the company
said after-tax, unrealized mark-to-market losses in the investment
portfolio rose to $6.3 billion at the end of the fourth quarter, up
$3 billion from the end of the third quarter. Losses in State
Street-administered asset-backed commercial paper conduits rose
$1.4 billion to $3.6 billion.
The conduits have been hit by the credit turmoil and there are
fears State Street will have to consolidate the vehicles on its
balance sheet.
"We continue to believe that the asset quality of both our
investment portfolio and the conduit program remains strong," said
State Street Chief Executive Ronald Logue in the earnings
release.
State Street lowered its 2009 outlook and now sees flat growth
in revenue and operating earnings.
The company said after recent discussions with investors, it has
"determined not to raise equity capital in this turbulent
market."
On Tuesday's analyst call, Logue said State Street's capital and
leverage ratios are strong, but said he understands that investors
are concerned about the mark-to-market impact of conduit
consolidation.
"Obviously, the increases in the negative marks in our
investment portfolio and in our conduits concern us," the CEO said.
"But we still believe that they are for the most part a result of
the lack of liquidity in the market and not a result of their
credit quality."
New risk factors
State Street in a filing Friday updated its risk factor
disclosures, which helped fuel the sell-off in the shares.
The company said it may be exposed to customer claims, financial
loss, reputational damage and regulatory scrutiny as a result of
transacting purchases and redemptions relating to the unregistered
cash collateral pools underlying its securities lending program "at
a net asset value of $1.00 per unit rather than a lower net asset
value based upon market value of the underlying portfolios."
"This relates to the company's decision to protect its clients
in the securities lending business from loss related to their cash
float," said Ladenburg Thalmann analyst Richard Bove in a research
note. "The assumption had been that State Street had paid out the
monies in question and no new funds would be exposed. This new risk
provision raises questions as to whether this assumption is correct
or not."
State Street warned it could recognize a material charge to
earnings and see its capital ratios hurt if all or a significant
portion of the unrealized losses in its portfolio of investment
securities "were determined to be other-than-temporarily
impaired."
Finally, its business activities, including the unconsolidated
asset-backed commercial paper conduits its administers, expose it
to liquidity and interest-rate risk.
Bove said the last new risk factor raises the question as to
whether State Street has changed its mind about not needing to
consolidate its off-balance-sheet conduits. Such a move could force
the company to raise capital by selling new equity, the analyst
said.
"In sum, nothing has outwardly changed at State Street," Bove
wrote. "However the acknowledgement of these issues at this time
needs to be explained by the company quickly."
"The main question is if and when State Street will need to
issue more capital," said Deutsche Bank analysts in a note to
clients Tuesday.
State Street in December said it planned to cut roughly 6% of
its global workforce in an effort to reduce costs amid the economic
downturn.
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