Fiduciary Banks, More Financial Sector Funerals (STT, BK)

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The so-called fiduciary banks were never supposed to be immune from the woes of the financial sector.  They were supposed to be more-resistant than most depository and lending institutions.  Ask anyone holding State Street Corp. (NYSE: STT) or The Bank of New York Mellon Corp.  (NYSE: BK) how that theory is working out.

These stocks are getting crushed today.  State Streetis down almost 50% now at $18.25 after indicating down around $25.00earlier this morning.  That marks a multi-year low, and actually a lownot seen in over a decade.  The Bank of New York Mellon is also down almost 25% at $17.25.

State Street had achieved double-digit income and revenue growth in2008, but expects flat results in 2009 rather than previously stated projections of 8% to 12% in revenue and 10% to 15% earnings growth. The bankdetermined not to raise equity capital as it decided to freeze wages;and the company will evaluate its dividend in the first quarter.  Inshort, a dividend cut is now a possibility. Outside of items for the last quarter, the company’s earningswere $1.18 EPS rather than the $1.14 First Call estimate and down fromthe $1.38 EPS from the same period a year ago.

The Bank of New York Mellon decided things were dire enough that itdecided to release earnings for after the close of trading today.  Thebank’s Tier 1 Capital Ratio is expected at 13.1%, above the 9.3%reported as of September 30, 2008.  Its Tangible Capital Equity Ratiois right at 3.8% versus the 3.9% reported as of September 30, 2008.

Again, no one expected these to be immune.  We already saw the tradingspike last year where these two crashed on market fears, but then thereality of the situation caused at least some stabilizing rationale tocome into play.  Now it turns out that at least part of the fears werereal.

We believe that the compression in clients and the compression in thevalue of assets only exacerbates some of these fears.  But seeing a 50%drop in State Street and a  25% drop in the Bank of New Yorkis almost off the charts.

Too bad State Street was not able to communicate at least something resembling a more stable message. 

Jon C. Ogg
January 20, 2009