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State Street: Goldman Deal Loser

NEW YORK ( TheStreet) -- State Street (STT - Get Report) was the loser among the largest U.S. financial names on Tuesday, with shares declining 6% to close at $41.31.

The broad indexes fought back from early declines to close with 1% gains, after Federal Reserve Chairman Ben Bernanke said in testimony before the Senate Committee on Banking, Housing, and Urban Affairs, that "economic activity appears to have decelerated somewhat during the first half of this year," and that after U.S. economic growth slowed from an annualized 2.5% increase real gross domestic product (GDP) during the second half of last year to 2% during the first quarter of 2012, "available indicators point to a still-smaller gain in the second quarter."

The KBW Bank Index (I:BKX) rose 1% to close at 46.32, with all but three of the 24 index components showing gains for the session.

State Street's shares slipped after the company announced a deal to purchase Goldman Sachs (GS) unit Goldman Sachs Administration Services (GSAS) for $550 million. GSAS administers about $200 billion in hedge fund assets for approximately 150 clients. State Street said it expected the deal to close during the fourth quarter, and that the transaction would be "accretive in the first full year of operation on a cash basis," but didn't spell out how much of an affect the new business would have on the company's GAAP earnings per share during 2013.

State Street on Tuesday also announced second-quarter earnings available to common shareholders of $480 million, or 98 cents a share, bearing the consensus estimate among analysts polled by Thomson Reuters by a penny. In comparison, the company earned $417, or 85 cents a share, in the first quarter, and $502 million, or a dollar a share, in the second quarter of 2011.

One major concern for investors and analysts is the decline in the company's estimated ratio of Tier 1 common equity ratio to risk-weighted assets, now that U.S. regulators have proposed changes to the way that risk-based assets are calculated for large banks. State Street reported an estimate Basel III Tier 1 common equity ratio of 12.7% under the original Basel III proposed capital guidelines, however, under federal regulators' proposed rules to calculate risk-weighted assets, including the Simplified Supervisory Formula Approach, or SSFA, the estimated June 30 Basel III Tier 1 common equity ratio would drop to 9.8%.

Evercore Partners analyst Andrew Marquardt has an "Equal-Weight" rating on State Street, with a $46 price target, and said on Tuesday that State Street's capital ratio disclosure "is notable given the degree of revision and how this is roughly in line with mgmt's [long-term] goal of 10%," and added that share buybacks during the second quarter were "buybacks were about in line at 11m shares."

State Street's shares have now returned 11% year-to-date, following an 11% decline during 2011.

STT Chart STT data by YCharts

Based on a quarterly payout of 24 cents, the shares have a dividend yield of 2.32%.

The shares trade for nine times the consensus 2013 earnings estimate of $4.44. The consensus 2012 EPS estimate is $3.86.

Interested in more on State Street? See TheStreet Ratings' report card for this stock.
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