NEW YORK ( TheStreet) -- Wall Street was stunned yesterday that State Street Corp. ( STT) 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) and Northern Trust ( NTRS) 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) and Morgan Stanley ( MS), 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), Citigroup ( C) or Bank of America ( BAC). 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). 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.