Jan. 15 (Bloomberg) -- State Street Corp., the world's largest money manager for institutions, said fourth-quarter earnings fell 28 percent after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages.

Net income declined to $223 million, or 57 cents a share, from $309 million, or 91 cents, a year earlier, the Boston-based company said today in a statement. State Street said 2008 growth will be at the lower end of its target ranges, sending the shares down 5.9 percent in New York composite trading.

State Street faces at least three class-action lawsuits from investors claiming its funds made inappropriate bets on subprime-backed securities. It disclosed the legal reserve Jan. 3 and replaced William Hunt, its chief investment officer for the past three years. State Street's 2008 forecast follows a year in which the company exceeded analysts' estimates.

``People are trying to figure out just how much of the strength State Street showed in 2007 is truly sustainable,'' Thomas McCrohan, an analyst at Janney Montgomery Scott LLC in Philadelphia, said in an interview today.

State Street fell $5.04 to $79.82 at 4:04 p.m. in New York Stock Exchange composite trading after declining to as low as $78.11. The stock has risen 12 percent in the past year, while the 13-member Standard & Poor's Supercomposite Asset Management and Custody Banks Index has declined 0.1 percent.

Excluding the legal reserve of $279 million after taxes, or 71 cents a share, profit was $1.38 a share, beating the $1.35 average estimate of 15 analysts surveyed by Bloomberg. State Street's earnings for 2007 were $4.57 a share, outpacing the $4.55 estimate of the 15 analysts.

2008 Targets

State Street in July completed its $4.3 billion acquisition of Investors Financial Corp., which will begin adding to profit this year, the company said. State Street expects to increase revenue 14 percent to 17 percent in 2008, earnings per share by 10 percent to 15 percent, and return on equity by 14 percent to 17 percent, Chief Executive Officer Ronald Logue said. He said in an interview he expects to achieve 2008 growth ``near the lower end of these ranges.''

``We try to be conservative, and what we are thinking and planning for is lower activity'' in the foreign-exchange and securities-servicing markets, Logue said.

Custody banks, which provide services including securities- lending and asset-servicing for clients such as mutual funds, earn more money when the markets are active or volatile. Market movements measured by the Chicago Board Options Exchange SPX Volatility Index rose in November to the highest since 2003. The index has fallen 21 percent since then.

Service Fees

Increased volatility in the fixed-income markets during the fourth quarter helped State Street's securities-finance fees almost triple to $256 million. Trading-services fees, which include foreign-exchange revenue, jumped 73 percent to $352 million.

Management fees from State Street's investment unit rose 17 percent to $297 million, and processing fees fell 38 percent to $38 million because of costs to fund asset-backed commercial paper. Revenue rose 53 percent to $2.48 billion. Non-U.S. sales accounted for 41 percent of all revenue in 2007, up from 39 percent in 2006.

Net expenses rose 84 percent to $2.1 billion because of costs related to the acquisition of Investors Financial and the legal expense. Operating expenses, excluding those items, rose 40 percent to $1.65 billion.

State Street said it plans to offer $500 million of non- dilutive securities eligible for treatment as tier 1 regulatory capital. State Street said it will use the money for general corporate purposes.

New Assets

The company is the third-largest asset custodian. Assets under custody rose 29 percent to $15.1 trillion from a year earlier. Assets in funds and portfolios for clients rose 13 percent to $1.98 trillion from a year earlier.

During the fourth quarter, State Street won $300 billion in new business for custody services, including an assignment to manage pension-fund assets from Dutch food producer Royal Cosun. State Street also got $30 billion in new business on the asset- management side, including an assignment to manage a long-short portfolio for the pension funds of the British Airport Authority.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

Last Updated: January 15, 2008 16:27 EST