Is It Safe? State Street Offers Solid Bank Bet

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Recent bank stress tests have left many investors optimistic about financial stocks. State Street(STT Quote) is one of the few companies that merits such enthusiasm.

Shares of the custody bank have climbed 20% this quarter, trailing the 28% gain of the S&P 500 Financials Index. The gap has created an opportunity to invest in a stable company at a discounted price.

With more than $12 trillion in assets under custody, State Street profits from simply warehousing assets. This unsexy business, which includes performance analysis and record keeping, accounts for 85% of the company's revenue. These services helped shield State Street from the brunt of the financial meltdown, which hit banks that focus on investment management and proprietary trading much harder.

Pension funds, investment firms and banks hire State Street to track and store their assets. These clients need the company's custody services in good times and bad, ensuring a consistent revenue stream.

Stock declines have pushed State Street's custody assets down in recent quarters, resulting in lower fee revenue from those services. In the first quarter, fees for servicing assets fell 20% from a year ago. During the bull-market years, servicing fees routinely rose more than 10% a quarter.

Still, State Street's fee declines have been less damaging than those of money managers Legg Mason(LM Quote) and T. Rowe Price Group(TROW Quote), whose investment advisory fees have plummeted more than 30% in recent quarters. Firms that manage money can lose clients if performance suffers during an economic downturn, while banks that depend on proprietary trading can see profits evaporate over a few bad transactions.