Monday, January 19, 2009

State Street (NYSE:STT): 8-K filed: Very Large Increase in Unrealized Losses, Proforma TCE Ratio with Conduits Under 1%? - JPM

JP Morgan is out with some negative comments on State Street (NYSE:STT) that filed an 8-K after market close on Friday to disclose very large increase in unrealized losses in its securities portfolio and in its conduits.

By firm's estimates, proforma tangible common equity ratio with the conduits would likely fall from an already thin level of 3% at 9/30 to below 1% at 12/31/08. TCE ratio for its on balance sheet assets would be about 3.5% including deferred tax benefit, down from 4.8% at 9/30.

STT also disclosed a $78 mil securities impairment charge in 4Q08. 4Q results will include previously announced $450 mil charge for managed accounts. There was also a charge of $160 mil in 1Q08 for these managed accounts.

Unrealized losses in its $78 bil securities portfolio rose to about $9 bil pretax from $5.3 bil at 9/30, and unrealized losses in its ABCP conduits rose to about $6 bil pretax from $3.5 bil at 9/30.

Analyst notes they are very surprised by the timing of the filing, as STT is scheduled to report earnings Tuesday morning before market opens, and this filing will raise concerns about capital adequacy.

Notablecalls: It looks like State Street (NYSE:STT) is going to get clobbered tomorrow morning regardless what the headline numbers are going to look like.

I don't have many previews handy but a quick glance shows Barclays expected unrealized losses on STT's $78B securities to exceed $4.5B ($3.3B AT in 3Q), while losses on its $25.5B ABCP conduit to exceed $3B ($2.1B in 3Q). They also expected consolidated TCE ratio fall below 3% (reported should be over 4%).

Judging from this it looks like the unrealized losses are 2x larger than expected. Were it Citigroup, it wouldn't be a surprise but in State Street's case I suspect the market will react in a rather painful manner.

Waterpistol to the head, I think $32 level could be breached in the very n-t.

PS: Congrats to those few who managed to short STT stock around $36 level Friday after market close. Just 10,000 shares, but hey you are in the money!

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