Fitch cuts State Street, revises outlook to negative

Fitch Ratings lowered the ratings of State Street Corp. and its primary operating subsidiary State Street Bank and Trust Co., plus revised the outlook to negative from stable.

Earnings in recent quarters have come in well below their historical trajectory, due to pressures in the external environment, including low interest rates as well as low transaction volumes and generally soft equity prices, Fitch said.

Management has been able to offset some of this pressure by controlling expenses and generating new business growth but earlier this year announced it would lower its return on equity target range for 2003 and 2004 to 13-15% from 18%.

Management also announced a voluntary retirement program to enable the company to reduce its cost base to match expenses. This targeted 1,800 positions, but employee demand was greater and some 3,100 employees accepted the severance program and will be departing over the next few months. Thus, the company will need to rehire roughly 1,000 employees over the next year to return staffing to optimal levels.

The acquisition of Deutsche Bank's global securities servicing unit continues to progress toward meeting the financial goals management established for the transaction, Fitch said. But intangibles created by this acquisition have temporarily lowered the overall tangible common equity base to 4.15%. Management plans to rebuild this ratio toward historical levels over the next year.

The downgrade reflects the greater than anticipated degree of exposure to the external environment, while the outlook signals potential execution risk in hiring and training new staff while integrating the Deutsche acquisition, Fitch said.

Revised ratings still reflect the view that State Street retains strong financial underpinnings, a formidable franchise and a solid management team. Fitch also believes that if improvements in equity market trends and the interest rate environment are sustained, these should help recover earnings momentum.

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