State Street Corporation will record a net charge, after taxes, in the fourth quarter of 2007 of $279 million, or $0.71 per share.
The purpose of the charge is to establish a reserve to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by State Street Global Advisors (SSgA), the company’s investment management arm, and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent.
As a consequence of the unprecedented events in the credit markets over the past six months, these strategies were adversely impacted by exposure to, and the lack of liquidity in, sub-prime mortgage markets. In aggregate, the reserve will be $618 million on a pre-tax basis. The impact to earnings of the net charge, after taking into account the tax effect of the reserve and associated lower incentive compensation cost, will be $279 million.
“We have reviewed the actively managed fixed-income strategies at SSgA that contained investments backed by sub-prime mortgages. Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies,” says Ronald E. Logue, chairman and CEO, State Street.
Earnings per share for 2007 are expected to be between $3.42 and $3.45 per share, and return on equity is expected to be approximately 13%, all on a GAAP basis.
On an operating basis, which excludes the impact of the charge announced today, the merger and integration costs associated with State Street’s acquisition of Investors Financial in July 2007, and, for 2006, the effect of 2006 tax adjustments of $65 million, or $0.20 per share, 2007 earnings per share is expected to be between $4.54 and $4.57 per share and return on equity is expected to be approximately 17.5%.
Both operating earnings per share and return on equity for 2007 are expected to be above the ranges provided on October 16, 2007. This outlook for full-year earnings per share on an operating basis compares to 2006 results of $3.46 per share.
The company continues to expect to exceed the year-over-year revenue growth range of 20% to 22% provided on 16 October 2007.