UPDATE 5-State Street sees $350 mln loss from bond sales

* Will take $350 mln loss against vs. Q4 earnings

* Sells $11 billion of securities

* Still expects higher Q4 operating earnings

* Shares down 1 percent
(Adds detail, updates share price)

By Svea Herbst-Bayliss and Ross Kerber

NEW YORK/BOSTON, Dec 9 (BestGrowthStock) – State Street Corp
(STT.N: ), one of the world’s biggest institutional investors,
said a sale of bonds to meet new regulatory requirements would
lead to a $350 million loss to be taken in the fourth quarter.

The sale was the latest move by the company’s new chief
executive, Joseph Hooley, to refocus State Street on its
traditional businesses such as keeping securities in custody
for other investors, after the company was hard hit by the
financial crisis.

State Street said it would record a fourth-quarter,
after-tax loss of $350 million on the sale of $11 billion of
bonds, but operating earnings would still top year-earlier
results.

The bank, which manages $2 trillion and has about $20
trillion in assets under custody, sold the mortgage-backed and
asset-backed securities after regulators agreed on rules that
will require large banks to have a bigger cushion of reserves
to prevent another financial crisis.

The loss reflects the difference between the sale price and
the value at which State Street carried the securities on its
books.

Not counting the $350 million loss, analysts on average had
expected the company to report net income of $445 million in
the fourth quarter, according to Thomson Reuters I/B/E/S.

Some investors reacted to the news by sending State Street
shares lower on expectations the securities sales will reduce
its profit in 2011. The shares closed down nearly 1 percent for
the day, though that was less than earlier in the day as other
investors took the dip as a buying opportunity and other bank
stocks rallied.

“Looks like State Street may be thinking about the short
term at just the wrong time,” Nicholas Gerber, portfolio
manager of Ameristock Mutual Fund, said via email. The fund
owns 134,000 shares of the company, and Gerber said custody
banks like State Street and BNY Mellon [BK.N] are poised to do
well in a growing economy “if they have the capacity to
expand.”

State Street said the sales will increase its balance sheet
flexibility in deploying its capital, shore up its capital
ratios under evolving regulatory capital standards, and reduce
its exposure to certain asset classes.

Since the financial crisis, State Street has tried to
return to its historically more conservative roots. It cut
costs through heavy layoffs and slashing its dividend. Earlier
this year it appointed Hooley as its new chief executive, and
recently it surprised analysts by announcing still more layoffs
— another 1,400 positions.

In an interview, RBC Capital Markets analyst Gerard Cassidy
said he would cut his estimate for State Street’s 2011 earnings
by about 20 cents a share — from the current $3.90 — because
the securities sales will mean lower income on State Street’s
bond portfolio.

Still, Cassidy said the sales were a good move because they
make the bank less dependent on riskier assets.

“They took on riskier assets, and it blew up on them,”
Cassidy said. Now, he added, “Hooley is de-risking the
profitability, which makes sense. They are not a bond manager,
they’re a custody bank.”

Investor Martin Sass, chief executive of M.D. Sass in New
York, said his firm owns more than 1 million shares of State
Street and was buying more after Thursday morning’s
announcement.

The lost income next year should be offset by gains in
other areas, he said, adding that State Street also has a
chance to buy custody businesses from European banks looking to
raise capital.

“The company has momentum on the new business front,” he
wrote via email, and added that it could benefit from an
“equity market rally that will offset weakness in net interest
income.”

State Street previously said the after-tax, unrealized
mark-to-market losses in its investment portfolio, which had
worried investors in recent years, had shrunk to $281 million
in the third quarter, down 72 percent from the second quarter.
(Editing by John Wallace, Dave Zimmerman and Steve Orlofsky)

UPDATE 5-State Street sees $350 mln loss from bond sales