By John Spence
BOSTON (Dow Jones) -- State Street Corp., which has seen its
shares dive on investor concerns over unrealized losses in its
investment portfolio and off-balance-sheet vehicles, announced a
plan Thursday to improve so-called tangible common equity,
including cutting its dividend to a penny a share.
The Boston-based company (STT) said the plan includes "actions
intended to increase organic capital growth and a reduction in the
size of the company's balance sheet."
The giant custody bank and asset manager also lowered its
outlook for 2009, while the quarterly dividend was cut to a penny a
share from 24 cents.
Shares of State Street were up about 8% in midday trading
Thursday.
The stock has plunged recently and investors have been worried
that the company could suffer losses if it is forced to consolidate
asset-backed commercial-paper conduits it administers onto its
balance sheet.
Markets have also been closely following tangible common equity,
or TCE, ratios during the credit crunch as a measure of a company's
capital strength and ability to suffer losses before raising
capital and diluting existing shareholders.
With many banks' common equity so low and balance sheets under
pressure, shareholders are worried that more losses may wipe them
out.
"State Street did not announce an equity offering," said
Ladenburg Thalmann analyst Dick Bove in a note. "This is just as
important as the other announcements that the company has
made."
'Extraordinary times'
"These are extraordinary times that require swift action," said
State Street Chief Executive Ronald Logue in a prepared statement
Thursday.
"While our tangible common equity ratio will vary with the
impact of the fixed-income markets on our investment portfolio and
the conduit assets and our actual results, we currently anticipate
that the steps we are announcing will result in a meaningful
increase in our tangible common equity ratio during the first
quarter and the full year," the CEO said.
In explaining its lower 2009 outlook, State Street cited a more
conservative reinvestment plan affecting assets paying down and
maturing in its investment portfolio. It lowered its view on U.S.
stocks for 2009 and intends to cut expenses.
"As a result, we now expect our operating revenue to decline 8%
to 12% from record levels in 2008; our operating earnings per share
to decline 12% to 16% from the updated record level of $5.61 per
share in 2008; and our return on common equity to approach the low
end of our 14% to 17% long-term range," State Street said.
The financial-services giant said unrealized losses in the
investment portfolio and in the conduit assets have improved. At
the end of the fourth quarter, total assets outstanding in the four
conduits that State Street sponsors were $23.9 billion, the company
said. The unrealized loss in the conduit assets at the end of
December was $3.56 billion.
The company was holding a meeting with investors and analysts on
Thursday in New York.
Cutting bonuses
State Street updated its 2008 results to reflect a $278 million
pre-tax reduction in incentive compensation as part of the plan to
boost TCE. State Street eliminated 2008 incentive compensation for
five executive officers and cut it by about 50% for the rest of the
company.
"Given that we are asking our shareholders to make sacrifices
through dividend reductions, we believe that we must also be
willing to make our own sacrifices," Logue said.
State Street said its TCE ratio at Dec. 31 was 4.61%, while the
pro forma TCE ratio, including consolidation of all assets and
liabilities of the State Street-administered asset-backed
commercial paper conduits, was 1.19%.
"Assuming market prices remain constant from January through the
rest of 2009 and we execute on our plan, we expect TCE to be
approximately 4.91% by the end of 2009," the company said.
Wall Street reacts
Standard & Poor's Ratings Services on Thursday said its
rating on State Street was unaffected by the company's plan to
increase TCE.
S&P said its recent ratings cut "addressed our concerns
about the heightened business and market risks State Street is
facing in the current global market crisis, evidenced by some
large, surprising charges during the past five quarters."
The S&P analysts said they continue to be concerned "about
reputational risks in State Street's large securities-lending and
asset-management businesses, which could hurt profitability."
Shares of State Street lost nearly 60% on Jan. 20 after the
company reported sharply lower fourth-quarter earnings and updated
its risk factor disclosures in a regulatory filing.
"With the outlook for 2009 growing decidedly gloomier, State
Street is trying to soothe investor concerns about its pressured
TCE ratio -- one of Wall Street's new favorite metrics," said
Isabel Schauerte, an analyst at Celent, a Boston-based financial
research and consulting firm.
"Despite State Street's commitment to returning tangible capital
to prior levels, it is questionable whether the measures taken will
suffice to satisfy investors and rating agencies," Schauerte
said.
"The main question is how much pressure management feels to
raise new capital, and whether government actions could either help
or hurt its efforts," Deutsche Bank analyst Mike Mayo wrote in a
report this week.
"There is no doubt in our mind that State Street's core
businesses benefit from a number of competitive advantages that
form a wide economic moat," said Michael Kon at Morningstar in his
latest analyst note on the company.
"However, the firm's investment endeavors have impaired the
balance sheet to a degree that jeopardizes the rights of current
shareholders to benefit from these competitive advantages in the
future," Kon said. "We would reconsider our position if losses
abate or the firm finds a solution that will lower the risk to
shareholders."
Capital worries
Some analysts had expected State Street to announce steps to
improve capital at Thursday's meeting to address investor concern
over TCE levels, although the core business is holding up
relatively well.
State Street has a conservative reputation, but its image has
been tarnished somewhat recently by uncertainty over the conduits
and big credit-related losses in some bond funds it oversees. The
stock has been extremely volatile in recent months on fears State
Street will need to raise equity by selling new shares.
State Street is among the banks that have received capital under
the Treasury Department's Troubled Asset Relief Program, or
TARP.