State Street stock falls on accounting worries

A U.S. flag flies outside the headquarters of State Street Corp in Boston, Massachusetts September 18, 2008.

BOSTON (Reuters) - State Street Corp's (STT.N). share price fell as much as 10.6 percent on Thursday as investors worried that new accounting rules might not help the financial services company as much as they had initially hoped.

The decline followed on the heels of a strong share price gain sparked by news that the Federal Accounting Standards Board had voted to allow banks to apply new mark-to-market guidance in the first quarter of 2009.

"State Street was perceived to be a large beneficiary of the accounting rule changes, and now the market may be concluding that it overestimated that effect a little bit," said Murali Gopal, analyst at Keefe, Bruyette & Woods Inc.

For months investors had been worried about State Street's unrealized investment losses, which the company said in January had nearly doubled to $10 billion in the fourth quarter.

The new accounting rule, analysts and investors reasoned, would be especially helpful to State Street.

But on Thursday news from JP Morgan Chase & Co (JPM.N), which reported better-than-expected first-quarter profit but noted some weakness in the servicing business and little effect from the accounting rule, threw some cold water on those hopes.

Boston-based State Street is one of the world's biggest institutional investors and also earns fees for providing accounting and record-keeping services to large pension and hedge funds around the world.

Analysts and investors said State Street's share price decline is not a complete surprise considering that the stock had gained 19 percent in the first week and a half of April after the accounting rule change was announced.

"The move in the stock today could be part of a normal trading cycle, with the stock retracing some its amazing recent gains," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group.

In early February State Street said it would slash its dividend 96 percent and eliminate bonuses to top executives to help increase its capital.

The company also unveiled a more conservative plan for its investment portfolio, moving money from maturing mortgage-backed securities to more conservative assets.

Those steps helped support State Street's share price some after it had cratered as much as 55 percent on January 20, when executives announced unrealized losses for the fourth quarter.

State Street is expected to release its first-quarter earnings on April 21.

State Street shares were off $2.44 or 6.8 percent to $33.25 in afternoon New York Stock Exchange trading after falling as low as $31.89 earlier.

(Additional reporting by Doris Frankel, editing by Gerald E. McCormick)