Jubak Picks 50 portfolio member State Street (STT) is gradually finding its way back to its core business of collecting fees for managing assets that belong to others and away from an ill-fated build up of its own investment portfolio. At the height of that past strategy State Street’s investment portfolio had climbed to 50% of total assets, according to Morningstar. That strategy rested on a base of cash raised in the short-term markets, was sometimes invested in complex instruments that carried more risk than advertised, and led the company into using off-balance sheet accounting gimmicks to diminish reported risk. All that blew up on State Street in the global financial crisis. And as a result the company has spent quarters rebuilding its capital through a $1.5 billion equity offering, moving $23 billion in assets back onto its balance sheet, and setting aside $618 million in reserves to cover investor lawsuits.
But as I wrote in my December 15 post, the financial companies that now show the most promise as investments are those reformed sinners who came out of the crisis not undamaged but just less damaged than competitors. (http://jubakpicks.com/2009/12/15/reverse-goldilocks-bank-stocks-the-best-buys-werent-really-terrible-or-really-good-but-just-bad-enough/ )
It’s that reformed sinner status that has let State Street go back on the acquisition trail picking up fee-paying assets from more damaged competitors.
In its most recent deal State Street has bought the securities custody unit—that’s a business that holds securities for other investors—of Intesa Sanpaolo for about $2.5 billion. The Intesa unit manages about $525 billion in assets. That’s about a 28th of the assets that State Street administers, but the deal for a unit with a leading presence in Italy and a good chunk of business in Luxembourg continues State Street’s recent strategy of increasing its business outside the United States to 50% of revenue over time.
I think deals like this mark a strategic change for the better. You can see the improvement reflected in State Street’s credit rating. On December 22 Fitch Ratings raised the individual and preferred stock ratings of State Street to B/C from C and raised the preferred stock rating of State Street’s trust preferred subsidiaries to BBB+ from BBB.
Full disclosure: I do not own or control shares of any company mentioned in this post.