State Street: Goldman Deal Loser

By Philip van Doorn - 07/17/12 - 4:12 PM EDT

Tickers in this article: CMA STT

NEW YORK (TheStreet) -- State Street was the loser among the largest U.S. financial names on Tuesday, with shares declining 6% to close at $41.31.

The broad indexes fought back from early declines to close with 1% gains, after Federal Reserve Chairman Ben Bernanke said in testimony before the Senate Committee on Banking, Housing, and Urban Affairs, that "economic activity appears to have decelerated somewhat during the first half of this year," and that after U.S. economic growth slowed from an annualized 2.5% increase real gross domestic product (GDP) during the second half of last year to 2% during the first quarter of 2012, "available indicators point to a still-smaller gain in the second quarter."

The KBW Bank Index rose 1% to close at 46.32, with all but three of the 24 index components showing gains for the session.

State Street's shares slipped after the company announced a deal to purchase Goldman Sachs unit Goldman Sachs Administration Services (GSAS) for $550 million. GSAS administers about $200 billion in hedge fund assets for approximately 150 clients. State Street said it expected the deal to close during the fourth quarter, and that the transaction would be "accretive in the first full year of operation on a cash basis," but didn't spell out how much of an affect the new business would have on the company's GAAP earnings per share during 2013.

State Street on Tuesday also announced second-quarter earnings available to common shareholders of $480 million, or 98 cents a share, bearing the consensus estimate among analysts polled by Thomson Reuters by a penny. In comparison, the company earned $417, or 85 cents a share, in the first quarter, and $502 million, or a dollar a share, in the second quarter of 2011.

One major concern for investors and analysts is the decline in the company's estimated ratio of Tier 1 common equity ratio to risk-weighted assets, now that U.S. regulators have proposed changes to the way that risk-based assets are calculated for large banks. State Street reported an estimate Basel III Tier 1 common equity ratio of 12.7% under the original Basel III proposed capital guidelines, however, under federal regulators' proposed rules to calculate risk-weighted assets, including the Simplified Supervisory Formula Approach, or SSFA, the estimated June 30 Basel III Tier 1 common equity ratio would drop to 9.8%.

Evercore Partners analyst Andrew Marquardt has an "Equal-Weight" rating on State Street, with a $46 price target, and said on Tuesday that State Street's capital ratio disclosure "is notable given the degree of revision and how this is roughly in line with mgmt's long-term goal of 10%," and added that share buybacks during the second quarter were "buybacks were about in line at 11m shares."

State Street's shares have now returned 11% year-to-date, following an 11% decline during 2011.

STT data by YCharts

Based on a quarterly payout of 24 cents, the shares have a dividend yield of 2.32%.

The shares trade for nine times the consensus 2013 earnings estimate of $4.44. The consensus 2012 EPS estimate is $3.86.

Interested in more on State Street? See TheStreet Ratings' report card for this stock.

Tuesday's winner among the largest U.S. bank holding companies was Comerica of Dallas, with shares rising 4% to close at $31.99.

The company reported second-quarter earnings attributed to common shares of 73 cents, beating the consensus estimate of a 62-cent profit among analysts polled by Thomson Reuters.

In comparison, Comerica earned $129 million, or 66 cents a share, in the first quarter, and $95 million, or 53 cents a share, during the second quarter of 2011.

Highlights for the quarter included growth of average commercial loans at an annual pace of 5%, and a return on average assets of 0. 93%, increasing from 0.84% the previous quarter, and 0.70% a year earlier. The return on average equity was 8.22%, increasing from 7.50% in the first quarter, and 6.41% in the second quarter of 2011.

FBR analyst Paul Miller rates Comerica "Market Perform," and on Tuesday raised his 2012 operating EPS estimate for the company to $2.70 from $2.33, and his 2013 estimate to $2.70 from $2.63, "given the strong core result in the quarter."

The analyst said "the primary drivers of our estimate increases are a lower than previously forecasted expense base and higher average loan balances that will be offset by lower net interest income as accretable yield contribution falls and Comerica experiences pressure on existing loan yields in the current rate environment."

Miller raised his price target for the shares to $34 from $31, to reflect his estimate that Comerica's tangible book value share will increase to $34.13 in the second quarter of 2013.

Comerica's shares have now returned 20% year-to-date, following a 38% decline during 2011.

CMA data by YCharts