Jan. 20 (Bloomberg) -- State Street Corp., the world’s largest money manager for institutions, shed 59 percent of its stock market value as analysts said the company may have to raise capital after unrealized bond losses almost doubled.

Losses that State Street would incur if it sold its fixed- income investments at current market value rose to $6.3 billion at Dec. 31 from $3.3 billion three months earlier, the company said today in its fourth-quarter earnings statement. State Street also spent almost $3 billion to prop up stable value funds that were hurt by the global decline in credit markets.

Net income fell 71 percent in the quarter from a year earlier, State Street said, as the worst financial markets since the Great Depression reduced the client assets on which State Street charges investment and custody fees. Consolidated tangible common equity, a measure of a company’s ability to absorb financial shocks, fell to 1.05 percent, including off- balance-sheet conduits.

“We believe there will be increased pressure on the company to raise common equity in the near future to maintain its credit ratings,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, wrote in a research note today. A common equity ratio below 2 percent is “something investors frown upon,” he said in an interview.

No New Capital

State Street rejected raising capital after discussions with institutional investors, Chief Executive Officer Ronald Logue said on a conference call with analysts and investors. In an interview with Bloomberg News, Logue said there were no “active discussions” about changing State Street’s quarterly dividend, which was last paid at 24 cents a share in December.

State Street raised $2.5 billion in a stock offering in June to bolster capital against potential investment losses. The company received a $2 billion infusion from the U.S. Treasury Department in October as part of a federal rescue package for banks. The government received preferred shares and warrants in State Street.

State Street today fell 59 percent in New York Stock Exchange composite trading, its biggest drop since at least 1984, wiping out about $9.2 billion of market value and dragging the stock market lower. It lost $21.46 to $14.89 at 4:15 p.m., its lowest price since October 1996.

BNY Mellon

Bank of New York Mellon Corp., the world’s largest custody bank, released earnings two days early after its stock fell 17 percent to $19. The company said net income fell 95 percent as it wrote down the value of its bond holdings by $1.2 billion. The stock fell to $18.39 on electronic markets after the close of regular U.S. trading.

Northern Trust Corp., a Chicago-based custody bank and asset manager, declined 14 percent to $43.93. Legg Mason Inc., which has also supported money funds, slid 18 percent.

State Street detailed more than $800 million in fourth- quarter losses in a regulatory filing made on Jan. 16 after 5 p.m. New York time, before the three-day Martin Luther King Jr. holiday weekend.

These included $450 million to protect investors from losses in stable-value funds; $306 million in costs related to eliminating 1,700 jobs; and a $78 million writedown to reflect losses in the company’s investment portfolio that are no longer considered temporary under U.S. accounting rules.

Unrealized losses on assets held in conduits increased to $3.6 billion from $2.2 billion, according to the filing with the U.S. Securities and Exchange Commission. Conduits are pools of long-term debt used as collateral to sell short-term debt.

Conduits

State Street may be required to bring the conduits onto its balance sheet on Jan. 1, 2010, if a proposed change in accounting rules is adopted by the Financial Accounting Standards Board. That leads most analysts to track its pro-forma consolidated common equity figure.

In an interview, Logue said it isn’t certain, even if it must consolidate the conduits, that the company would have to raise capital.

He expects unconsolidated tangible common equity to rise from the current 4.46 percent to more than 6 percent by the end of 2009. “That should be enough to handle the conduits,” he said.

Logue said he expected government stimulus efforts would also help improve fixed-income markets and reduce unrealized losses in the company’s investment portfolio and conduits.

Risks detailed in the document filed last week were “chastening,” analyst Richard Bove of Ladenburg Thalmann & Co. said in a research note. The filing shows “all of the fashions in which this company can lose its investors money.”

No Defaults

Logue said in the statement today there had been no defaults among the securities in the company’s $78.8 billion bond holdings or the $23.9 billion in conduits.

State Street’s credit ratings were lowered by Standard & Poor’s by one level to “A+/A-1” from “AA-/A-1+.” The ratings service placed a negative outlook on the company.

On the conference call, Logue said that through Jan. 16, the unrealized after-tax losses on its investment portfolio narrowed this year by $400 million to $5.9 billion.

State Street expects operating earnings this year to be about level with the $5.21 a share reported for 2008 after a 14 percent rise, Logue said. As recently as November, Logue said 2009 operating earnings growth would approach 10 percent. Revenue will be little changed after a 28 percent increase to $10.7 billion last year, he said today.

If operating earnings remain little changed, they would beat the $4.68-a-share estimate of 16 analysts surveyed by Bloomberg.

Custody banks like State Street keep records, track performance and lend securities to institutional investors including mutual funds, pensions and hedge funds. The State Street Global Advisors investment unit manages mutual funds and accounts for institutions and wealthy individuals.

Net Income Falls

Net income in the fourth quarter fell to $65 million, or 15 cents a share, from $223 million, or 57 cents, a year earlier.

Assets under custody fell 21 percent in the past year to $12 trillion. Assets under management dropped 27 percent to $1.44 trillion.

Excluding certain items, fourth-quarter profit was $1.18, beating the $1.13-a-share estimate of 13 analysts surveyed by Bloomberg.

Revenue was $2.67 billion, an increase of 8 percent from a year earlier. Fee revenue fell 2.4 percent to $1.89 billion.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

Last Updated: January 20, 2009 17:47 EST