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03 Jan 2008
Moody's affirms State Street's ratings; outlook turns Negative (Aa1 deposits)
New York, January 03, 2008 -- Moody's Investors Service affirmed State Street Bank & Trust Company's
ratings, at B+ for financial strength and Aa1 for deposits.
The rating agency also affirmed the Aa3 rating on senior debt of the holding
company, State Street Corporation (STT). Moody's,
however, placed a negative outlook on all related entities.
The rating actions followed STT's announcement that it will take
an after-tax charge of $279 million that will significantly
reduce net income in the fourth quarter 2007.
The affirmation was based on Moody's view of a limited near-term
negative effect on STT's financial fundamentals. STT's
main earnings driver is its strong position as one of the largest securities
servicers, a franchise that contributes the bulk of the company's
net income. According to Moody's, the fourth quarter
charges -- partly to build a litigation reserve -- will cause
a drop in STT's capital position. Although most consolidated
and bank-only capital ratios remain amply above "well capitalized"
thresholds, the Tier-1 leverage ratios have little such cushion.
A comparatively modest dividend payout ratio should help to replenish
capital to previous levels in relatively short order. Moody's
believes that despite the confluence of negative events -- the previously
highlighted ABCP liquidity concerns followed by these asset management-related
charges -- depositors and bondholders remain well protected.
In assigning a negative outlook, on the other hand, Moody's
noted the discrepancies between STT's clients' investment
directives and the firm's investment strategies that imply a lapse
in controls and a risk governance failure at State Street Global Advisors,
STT's asset management arm. The negative outlook also reflects
the reputational vulnerability of the asset management franchise and any
potential spillover into STT's other businesses. "This
is the second major reputational issue that STT has experienced in the
last six months," said Rosemarie Conforte, Moody's
Senior Vice President. "The company has a comparatively large
exposure to ABCP conduits that it sponsors and STT's liquidity and
capital potentially came under pressure when the conduits faced funding
stress in the third quarter 2007."
The rating agency added that the longer-term impact on the State
Street franchise, if any, is difficult to quantify.
If there is evidence of risk management weakness, any lapses in
internal controls are not fully addressed and remedied, or reputational
fallout proves to be significant, Moody's could take a further
negative rating action. If, on the other hand, the
franchise proves to be resilient, all other credit aspects being
equal, Moody's could return the outlook to stable.
State Street Corporation, headquartered in Boston MA, reported
assets of approximately $140 billion at September 30, 2007.
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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