State Street Plummets on Weak Outlook

State Street shares opened trading sharply lower Tuesday after the bank underwhelmed the Street with its 2009 expectations.
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Updated from 1:30 p.m. EST

Shares of

State Street

(STT) - Get Report

plummeted 59% Tuesday after the bank reported a sliding fourth-quarter profit and underwhelmed the Street with its 2009 expectations.

Boston-based State Street said fourth-quarter earnings declined 71% to $65 million, or 15 cents a share, vs. $223 million, or 57 cents a share, a year ago. For the full year 2008, the company reported a profit of $1.62 billion, or $3.89 a share, compared with $1.26 billion, or $3.45 a share, in 2007.

State Street announced operating-basis earnings of $1.18 per share for the fourth quarter, down 14% from $1.38 per share in the fourth quarter of 2007. It said it earned $5.21 per share on an operating basis for the full year, up 14% from $4.57 per share in 2007. Analysts polled by Thomson Financial were looking for a fourth-quarter profit of $1.14 a share and full-year earnings of $5.18 a share.

Chairman and CEO Ronald Logue said he expects 2009 revenue and operating earnings per share to be flat with 2008. The company's long-term revenue growth goal is 8% to 12% growth and it expects 10% to 15% growth in its operating earnings per share. The consensus analyst estimate for 2009 is a profit of $4.71 a share.

"While we expect 2009 to present industry-wide challenges, we believe that the revenue drivers we have identified and the expense controls we have in place, will allow us to meet the following 2009 financial goals, all stated on an operating basis," Logue said.

The company also said that it has decided not to raise equity capital "in this turbulent market."

On Oct. 27, State Street said it would receive a $2 billion investment from the Federal government under the Troubled Asset Relief Program (TARP).

Shares of State Street lost more than half their value to close Tuesday's trading at $14.89.

"In this environment, it's a good thing to be wanting to raise capital or take a handout," said Paul Nolte, director of investments at Hinsdale Associates. Nolte also pointed out that State Street's primary business is as a custodian and in securities lending, but that he's not sure that means the company is immune to consumer loans, mortgages and other problems that have hindered other financial firms.

"The fact that they are being adamant at least at this point that they're not looking at new capital ... it may reflect investors' concern that they're sticking their head in the sand," said Nolte.

State Street's fourth quarter was greatly hindered by charge-offs. The company's results included previously reported charges of $723 million, or $1.03 a share related to transaction, restructuring and integration costs.

Top-line results improved slightly. Fourth-quarter revenue came in at $2.67 billion, up 8% from the year-ago quarter.

Mike Mayo, research analyst for Deutsche Bank, said it may not be known whether State Street needs to raise more money until ratings agencies comment on the company's results. He said that with an increased in unrealized securities losses to $6 billion from $3 billion, the company's tangible common equity to total asset ratio has declined to 4.8%.

Following the release of Mayo's note, Standard & Poor's downgraded State Street's credit rating to single-A+/A-1 from double-A-/A-1+, with a negative outlook. An S&P analyst said $1.2 billion in special charges from the company's asset-management business and increased unrealized losses tied to off-balance-sheet assets contributed to the downgrade. S&P also said that the downgrade reflected a 2009 dismal earnings outlook.

Banks' capital levels are at the forefront of investor concerns after

Bank of America

(BAC) - Get Report

on Friday reported a fourth-quarter loss of $1.79 billion. The same day, the Treasury announced it would invest an additional $20 billion in TARP funds in the company and protect against losses on $118 billion in assets that were largely tied to BofA's Jan. 1 purchase of

Merrill Lynch

.

Meanwhile,

Citigroup's

(C) - Get Report

sale of a majority stake in its Smith Barney brokerage to

Morgan Stanley

(MS) - Get Report

has caused further concern that large

financial institutions

face additional capital shortfalls.

BofA, Citigroup and Morgan Stanley, along with State Street, are among the initial nine financial firms to receive preferred equity investments through TARP.