Standard & Poor’s (S&P) Ratings Services upgraded its outlook on State Street Corp. (STT) to ‘Stable’ from ‘Negative’. The rating agency is impressed by State Street’s recent restructuring programs and sale of risky investment portfolios in its securities lending business.
S&P confirmed State Street’s long-term counterparty credit rating at ‘A+’. Additionally, the rating agency affirmed counterparty credit rating on State Street Bank & Trust, the company’s main bank subsidiary, at ‘AA-/A-1+’.
Though State Street continues to face legal and reputation risks due to the consequences of the financial crisis, S&P believes that these risks are manageable in the near term. Further, the rating agency also expects the company to strengthen its capital levels, despite the recent dividend hike and share repurchase announcements.
Last Friday, State Street raised its quarterly cash dividend to 18 cents per share payable on April 15, 2011 to shareholders of record at the close of business on April 1, 2011. The company also announced that it would buy back $675 million stock in 2011, marking its first share repurchase program since January 2008. The company had announced these capital plans after getting approval from the Federal Reserve.
In the fourth quarter of 2010, State Street had announced a number of restructuring programs and also strategically repositioned its investment portfolio by selling investment securities. Though the restructuring programs are expected to lead to nearly $400–$450 million of costs, it will lead to annual pre-tax savings of approximately $575–$625 million. These actions are aimed at improving the company’s bottom line.
Apart from S&P, Fitch Rating also maintains a ‘Stable’ outlook on State Street. However, Moody’s Investors Service, the ratings arm of Moody’s Corp. (MCO), has a ‘Negative’ outlook on the company.
Though we are concerned about State Street’s risky investment portfolio exposure, we believe that the realignment of its investment portfolio, various restructuring programs, along with well-off core servicing and investment management franchises will help it to offset the financial weakness caused by the sluggish economic recovery, thereby providing buoyancy to growth in the near to mid term. Furthermore, the rating upgrade by S&P and the recent announcements regarding increasing shareholders’ value will boost the investors’ confidence.
State Street currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the shares.
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