State Street Corp., the world's largest money manager for institutions, fell the most since 1984 in New York trading after unrealized bond losses almost doubled and analysts said the company may have to raise capital.
Unrealized losses on State Street's fixed-income investments rose to $US6.3 billion ($9.6 billion) at Dec. 31 from $US3.3 billion at Sept. 30, the result of falling values throughout the credit markets, the company said today in a statement. State Street also incurred $US528 million in costs to prop up money funds and write down the value of investments on its portfolio.
Net income fell 71% in the fourth quarter from a year earlier, as plunging stock and bond markets reduced the client assets on which State Street charges investment and custody fees. The erosion of its fixed-income investments caused State Street's consolidated tangible common equity, a measure of a company's ability to absorb financial shocks, to fall to 1.05%.
``We believe there will be increased pressure on the company to raise common equity in the near future to maintain its credit ratings,'' Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, wrote in a research note today. In an earlier interview, Cassidy called a common equity ratio below 2% ``something investors frown upon.''
The company considered raising capital and rejected the idea after discussions with institutional investors, Chief Executive Officer Ronald Logue said on a conference call with analysts and investors. In an interview with Bloomberg News, Logue said there were no ``active discussions'' about changing State Street's dividend.
Pulling market lower
State Street fell as much as 55% in New York Stock Exchange composite trading, wiping out $US8.7 billion of market value and dragging the stock market lower. It lost $US17.33, or 48%, to $US19.02 at 12:13 p.m.
Rival asset custodian Bank of New York Mellon Corp. fell 27% to $US16.84, while Northern Trust Corp. declined 3% to $US49.52. Legg Mason Inc., which has also supported money funds, slid 9.4%.
State Street detailed more than $US800 million in fourth- quarter losses in a regulatory filing on Jan. 16. These included $US450 million to prop up its stable-value funds; $US306 million in costs related to eliminating 1,700 jobs; and a $US78 million writedown to reflect losses in the company's investment portfolio that are no longer considered temporary under US accounting rules.
Conduit losses
Unrealized losses on assets held in conduits increased to $US3.6 billion from $US2.2 billion. The filing also revealed that the company had purchased $US2.5 billion securities from the stable-asset funds.
Risks detailed in the document filed last week were ``chastening,'' analyst Richard Bove of Ladenburg Thalmann said in a research note. The filing shows ``all of the fashions in which this company can lose its investors money.''
Logue said in the statement today that none of the securities is in default.
``We continue to believe that the asset quality of both our investment portfolio and the conduit program remains strong,'' Logue said.
On the conference call, Logue said that through Jan. 16, the unrealized after tax losses on its investment portfolio narrowed this year by $US400 million to $US5.9 billion.
State Street expects operating earnings this year to be about level with the $US5.21 a share reported for 2008 after a 14% rise, Logue said. As recently as November, Logue said 2009 operating earnings growth would approach 10%. Revenue will be little changed after a 28% increase to $US10.7 billion last year, he said today.
Custody, investments
If operating earnings remain little changed, they would beat the $US4.68-a-share estimate of 16 analysts surveyed by Bloomberg.
Custody banks like State Street keep records, track performance and lend securities to institutional investors including mutual funds, pensions and hedge funds.
The State Street Global Advisors investment unit manages mutual funds and accounts for institutions and wealthy individuals.
Net income in the fourth quarter fell to $US65 million, or 15 cents a share, from $US223 million, or 57 cents, a year earlier.
Assets under custody fell 21% in the past year to $US12 trillion. Assets under management dropped 27% to $US1.44 trillion.
Excluding certain items, fourth-quarter profit was $US1.18, beating the $US1.13-a-share estimate of 13 analysts surveyed by Bloomberg.
Revenue was $US2.67 billion, an increase of 8% from a year earlier. Fee revenue fell 2.4% to $US1.89 billion.
Fund support
In the quarter, State Street decided to ``provide support'' to stable value accounts managed by the Global Advisors unit, according to the Jan. 16 filing with the
US Securities and Exchange Commission. In general, stable value funds promise to protect investors' principal and maintain a consistent price of $US1 a share because they are insured.
The insurance can be dropped if a company or fund undergoes significant changes. During the fourth quarter, the value of securities held by the State Street funds declined to the point that ``third-party guarantors considered terminating their financial guarantees,'' according to the filing.
State Street elected to purchase about $US2.5 billion of securities from the funds that had been identified as presenting increased risk, the company said in the filing. It agreed to contribute $US450 million to the funds to narrow the gap between the market value and book value of their holdings.
Meeting redemptions
State Street said that the net asset value of another group of unregistered funds had fallen as low as 91 cents a share on Dec. 31. These funds, which invest cash collateral that State Street customers receive in return for lending out their securities, also seek to maintain a net asset value of $US1 a share, though they are not required to do so.
The average value of these funds at Dec. 31 was 95.5 cents a share, State Street said in the filing, with a substantial portion of the decline occurring during the fourth quarter. Total assets in the affected funds have fallen to $US113 billion on Dec. 31, from $US178 billion a year earlier.
State Street has continued to sell and redeem shares of these funds at $US1 a share, it said in the filing. The funds can wait until the securities mature and they receive full face value from the borrower, rather than selling the holdings in the market at a loss.
The Jan. 16 filing said that continuing to sell and redeem shares at $US1 may prevent State Street from passing on the losses later to shareholders if the value of the securities in the fund don't recover.
The company also set aside $US200 million to cover losses stemming from indemnification obligations on $US1 billion in repurchase agreements that State Street clients purchased from Lehman Brothers Holdings Inc. The investment bank filed for bankruptcy protection Sept. 15.
Bloomberg News
