State Street posts higher profit, shares fall

Posted 10 16 2008 11:07AM

BOSTON (Reuters) - State Street Corp (STT.N), one of the world's biggest institutional money managers, reported rising unrealized losses in its commercial paper program and investment portfolio on Wednesday, sparking concerns among investors, who sent its shares plummeting more than 15 percent.

The losses overshadowed earnings that rose 33 percent, beating Wall Street estimates.

Investors have long expressed concern about unrealized losses that State Street has in its off-balance sheet commercial paper, or conduit program. Those losses widened to $2.2 billion now from $1.6 billion three months earlier. Also, the company said unrealized losses on its investment portfolio rose to $3.8 billion now from $2.01 billion three months earlier.

"That did not go up because of credit issues but because of illiquidity of the markets," Ron Logue, the company's chairman and chief executive officer, told Reuters.

The company, which also earns fees for calculating the bulk of mutual fund prices printed in newspapers, said third-quarter net income climbed to $477 million, or $1.09 per share, from $358 million, or 91 cents a share, a year earlier.

"Bottom line, State Street reported a respectable number," RBC Capital analyst Gerard Cassidy said, adding: "The real concern, however, is that unrealized losses continue to grow, and people worry that that could turn into a permanent loss."

Investors also worried that the company might have to take a large charge in the fourth quarter if it decided to assist some funds managed at its State Street Global Advisors unit.

POTENTIAL LEHMAN LOSSES

Excluding one-time charges, earnings rose to $1.24 per share from $1.15. Charges included 28 cents a share related to potential losses on loan collateral from Lehman Brothers Holdings Inc (LEHMQ.PK), which filed for bankruptcy protection last month.

Wall Street analysts had expected profit of $1.20 a share, according to Reuters Estimates.

Revenue rose 24 percent to $2.77 billion, as overall fee revenue rose 6 percent. Securities financing fees rose 49 percent while trading services fees climbed 13 percent.

At the end of the quarter, State Street had $14.05 trillion in assets under custody and had $1.69 trillion in assets under management. Like rival money managers, State Street has seen the totals shrivel as financial markets have tumbled in the last weeks.

State Street has benefited some from turbulent conditions because it earns fees for providing accounting services on portfolios that move around a lot in volatile markets.

Logue said the company has strong new business prospects after having won mandates recently from clients like the Massachusetts state pension fund, among others.

Despite turbulent conditions, Logue said the company was able to stick by a forecast that earnings-per-share growth for the full year will be at the high end of a range of 10 percent to 15 percent.

RAISE CAPITAL

He also said the company, which recently raised capital, would do so again if necessary. "We have no immediate plans to do that, but we don't want people to think that we wouldn't if it is necessary," he said.

State Street said on Tuesday that it will receive $2 billion from the U.S. Treasury as the government puts money into banks as part of its financial rescue plan, and therefore announced earnings earlier than originally scheduled.

The Boston-based company also said it might help some portfolios managed by its State Street Global Advisors unit that have been under pressure. That could result in a pretax charge of $400 million to $450 million.

It also said the Federal Reserve's plan to provide liquidity to commercial paper markets will help boost net interest revenue in the fourth quarter by $50 million to $60 million. But it is expected to hurt net interest margins by 25 to 30 basis points.

Logue said the company had shored up its asset-backed commercial paper program by buying securities. Also about $23 billion of the $25 billion in commercial paper assets in the conduits are eligible for the Federal Reserve's new fund to purchase commercial paper, designed to unlock frozen short-term debt markets, Logue said. "That creates a lot of relief."

Still, investors worried and the stock was off 15.3 percent at $48.00 in afternoon trading on the New York Stock Exchange.

State Street has fallen 39 percent this year, about in line with the drop in the Dow Jones U.S. Asset Managers Index (.DJUSAG).

(Reporting by Svea Herbst-Bayliss; Editing by Brian Moss and Gerald E. McCormick)