03.01.2008 20:00 Real Estate
However, State Street shares hit a new 52-week high as it raised earnings expectations. Shares of one of the world's largest money managers rose 7 percent on reported growth in core businesses providing record keeping and other back-office financial services for institutional investors.
William Hunt, who headed the State Street Global Advisors investment unit, resigned and was replaced on an interim basis by Executive Vice President James Phalen.
The set-aside for legal expenses and other costs from fixed-income investments totals $618 million on a pretax basis. But the charge is expected to shave just $279 million, or 71 cents per share, from fourth-quarter earnings taking into account the reserve's tax effects, and a resulting decline in costs from incentive compensation to employees.
Excluding that charge, State Street expects fourth-quarter revenue and profits, due in a couple weeks, will top expectations released in October.
RBC Capital Markets analyst Gerard Cassidy said the legal charge was greater than expected, and is likely big enough to cover all expenses from State Street's exposure to recent turmoil in mortgage-related investments.
The legal reserve "was a bitter pill for them to swallow, because it was a very expensive pill," Cassidy said. "But their basic business in the processing of financial assets is strong."
Cassidy said the weakening of the U.S. dollar has boosted State Street's business providing asset services tied to currency conversions by customers shifting investments overseas.
State Street expects to report fiscal 2007 earnings per share between $3.42 and $3.45 on revenue growth of more than 30 percent compared with 2006.
Excluding costs from the legal reserve and other expenses including last year's $4.2 billion acquisition of Investors Financial Services Corp., State Street expects 2007 earnings per share of $4.54 to $4.57. Analysts surveyed by Thomson Financial had been expecting a profit of $4.19 per share, on average.
In midday trading, State Street shares rose $5.73, or 7.3 percent, to $84.61, topping a 52-week high of $82.53, set on Dec. 11.
State Street said it intends to "vigorously" defend against claims tied to customers' soured investments — losses that State Street says largely arose from changes in market conditions, including deterioration in mortgage-related investments as more homeowners began to fall behind on payments. Clients that have sued State Street allege the company pursued more risky strategies than they had authorized.
In creating a legal reserve that is bigger than observers expected, Ronald Logue, State Street's chairman and chief executive, told analysts on a conference call, "We're not capitulating on anything....We're just trying to put it behind us."
Logue said the company is determined to avoid more such investment losses.
In response to State Street's announcement about the legal reserve, Fitch Ratings on Thursday lowered its outlook on State Street's creditworthiness to negative from stable.
State Street, based in Boston, has recently been named in lawsuits brought by Prudential Retirement Insurance and Annuity Co., a manager of retirement plans; New York-based publisher UnitSystems Inc.; and Nashua Corp., a New Hampshire-based maker of paper and imaging products.
Some state governments also invested public employee funds in State Street-managed bond funds hurt by the turmoil in investments tied to subprime mortgages.
Phalen, Hunt's temporary replacement, is also State Street's head of international operations for investment servicing and investment research and trading. A search will begin for a permanent replacement for Hunt.
In a filing with the Securities and Exchange Commission, State Street said Hunt will receive $14.1 million in severance compensation and benefits, excluding about $5 million in stock options, appreciation rights and retirement benefits that were already vested. He is not entitled to a 2007 bonus or any other annual incentive plan.
State Street controls $15.1 trillion in assets under custody and has $2 trillion under management.
