NEW YORK ( TheStreet) -- Wall Street was stunned yesterday that State Street Corp. ( STT - Get Report) expects to beat analyst expectations for the second quarter, but it probably shouldn't have been. State Street is a trust and custody bank. That means it essentially does back-end work in managing assets for individual clients, corporations and other banks. It makes money on fees, currency fluctuations and when interest-rate margins widen. During the fourth quarter, currencies were fluctuating quite a bit because of the European debt crisis. That also had ripple effects into the broader fixed-income markets in which State Street and its peers Bank of New York Mellon ( BK - Get Report) and Northern Trust ( NTRS - Get Report) operate. And since banks are still borrowing money at little-to-no cost, their margins on any type of lending or market activities is still at a historically high level. So, for the second quarter, as Wall Street Whispers has
noted in the past, it's a safe bet that trust and custody banks did pretty well. State Street forecast earnings of 93 cents per share on Wednesday - an outlook that's nearly 20 cents per share, or 30%, higher than Wall Street was expecting. Furthermore, since the financial-reform bill leaves T&C operations largely unscathed, they don't face huge headwinds going forward. As for their other big-bank brethren, the second-quarter and beyond will be a different story. Trading revenues were abysmal as spooked investors fled the volatile markets. That doesn't portend good things for Wall Street firms like Goldman Sachs ( GS - Get Report) and Morgan Stanley ( MS - Get Report), which earn fees from trading or income from proprietary trading. Nor does the market strife bode well for more diverse banks with big Wall Street operations like JPMorgan Chase ( JPM - Get Report), Citigroup ( C - Get Report) or Bank of America ( BAC - Get Report). Besides weak revenue, they will have to cut down on proprietary trading as well as investments in private equity and hedge funds as a result of finreg. The lending situation didn't much improve either -- particularly in regards to mortgages -- nor did consumer spending as confidence was depleted. The economic situation likely caused additional pain for the Big Four money-center banks, JPMorgan, Bank of America, Citi and Wells Fargo ( WFC - Get Report). The entire banking industry will have to stock more capital against loan-losses and riskier market operations as well -- setting up a situation for additional dilution going forward.
There are opportunities in the financial sector and investors have noticed: Stocks lost 12% over the second quarter -- with some big financial names getting hit much harder -- and since the start of the first quarter, the S&P 500 has gained 3% in just four trading days. The KBW Bank Index has added 4%. But viewing State Street's outlook as a barometer for the entire industry would be a mistake. -- Written by Lauren Tara LaCapra in New York.