State Street Corp. was the first trust bank to present second-quarter earnings, and its chairman and chief executive Ronald Logue set the stage for the rest of the industry by sketching out acquisition plans for the company's war chest of new capital.
Logue pledged Tuesday to pursue overseas deals while making sure not to overspend.
Analysts said trust banks, including State Street and Bank of New York Mellon Corp., are taking pains to demonstrate that they can continue to grow and add business while still preserving capital after exiting the Troubled Asset Relief Program.
"The trust banks want to show that, unlike the industry as a whole, they are ready to perform," said Burton Greenwald of BJ Greenwald & Associates of Philadelphia. "State Street wants to show that they are not a bank that is limping along in the current environment. They want to show they are in a position to gain share and customers."
Bank of New York Mellon and Northern Trust Corp. are scheduled to release earnings today.
Logue said the Boston company expects to increase its tangible common equity ratio to 6.5% by the end of the year after raising $2.3 billion in May. The additional capital, Logue said, will put State Street ahead of its trust banking competitors and position it for overseas acquisitions. He said State Street wants to buy "books of non-U.S. asset servicing business.'"
"We are going to proceed cautiously because of the lessons we have learned in the past year," Logue said in an interview. "Preservation and growth of capital is very important, but judicious use of capital is also important. We still have the goal of generating 50% of revenue from outside of the United States."
Marty Mosby of First Horizon National Corp.'s FTN Equity Capital Markets said trust banks are trying to determine how much capital they need. He said, for now, companies want to maintain higher TCE ratios. "Companies are going to look for acquisition opportunities, but they are going to want to preserve capital and not stretch themselves too far," he said.
Some analysts were skeptical of State Street's plan. "State Street needed to have a story to tell to accompany all of this capital that it raised," said Geoffrey Bobroff of Bobroff Consulting in East Greenwich, R.I.
During State Street's earnings call, Logue said the additional capital is part of its strategy to build "a strong post-Tarp State Street." He said it is the only banking company of the original nine to receive Tarp funding "to raise more capital than we were asked to take."
In February, State Street said it expected its TCE ratio to be at 4.91% by the end of the year. By the end of the second quarter, it was 4.96%. "Our goal for TCE was to be between 4.25% and 4.75% by the end of the second quarter, but by raising capital we are in an even better position," Logue said during the interview.
State Street posted a second-quarter loss of $3.18 billion, or $7.12 a share, compared with a $548 million profit a year earlier. The loss included a one-time charge of $8.16 related to the consolidation of the asset-backed commercial paper conduits onto its balance sheet and its Tarp repayment. Excluding those items, earnings would have been 1.04 cents a share. Revenue fell 21%, to $2.12 billion. On average analysts surveyed by Thomson Reuters expected earnings of 97 cents on revenue of $2.16 billion.
Logue said the large trust banks are primed to gather new business as a result of the consolidation in the industry. He said large financial firms want to work with asset servicers, including State Street, that can provide "more complex fund accounting and fund services."
Analysts said large trust companies are poised to take business from smaller competitors. Gerard Cassidy, an analyst with RBC Capital Markets, said State Street "had a terrible time with TCE" in the beginning of the year as its ratio hovered around 1%, so it instituted a program to correct the balance sheet and raise additional capital.
He said it has rebuilt TCE "dramatically" and is "way ahead of schedule" toward a recovery. "They aren't out of the woods, but this company is a prizefighter that got hit to the canvas with a body blow," Cassidy said. "They are back on their feet and back in the ring. I think they will be back to full strength in 12 to 18 months."
Logue said he was interested in buying in "Europe over Asia," but wouldn't predict when it would occur.