STATE STREET : and Bank of NY Mellon profits skid

BOSTON/NEW YORK (Reuters) - State Street Corp and Bank of New York Mellon Corp reported substantial losses on investments and sharply lower profits on Tuesday, and investors pummeled shares of the giant institutional money managers.

By Svea Herbst-Bayliss and Jonathan Stempel

State Street shares tumbled 59 percent after the company reported $10 billion in unrealized losses on investments and commercial paper, and said quarterly profit fell 71 percent. Standard & Poor's lowered State Street's credit rating.

Meanwhile, Bank of New York Mellon's profit plunged 88 percent, hurt by securities losses and lower fees as client assets declined. It reported earnings two days earlier than planned in the wake of State Street's results, and its shares slid 17.2 percent.

The results showed that banking problems extend beyond commercial and consumer lenders to companies that provide asset management as well as the back-office services -- unglamorous but crucial to the functioning of the financial system. The companies' roots date back to the 18th century, and their businesses were long considered relatively stable.

The so-called custodial banks and asset managers are under pressure as falling stock prices lead to a decline in assets and reduced fees based on asset totals.

"Frankly, it's pretty good to see 2008 in the rear-view mirror," Bank of New York Mellon Chief Executive Robert Kelly said on a conference call.

Another custody bank, Northern Trust Corp , is expected to report lower quarterly profit on Wednesday.

STATE STREET

Fourth-quarter profit at Boston-based State Street fell to $65 million, or 15 cents per share, from $223 million, or 57 cents, a year earlier.

Operating profit dropped 5 percent to $511 million, or $1.18 per share, topping the average analyst target of $1.14 per share, according to Reuters Estimates. Revenue rose 8 percent to $2.67 billion.

Custodial assets fell 21 percent to $12.04 trillion, and assets under management fell 27 percent to $1.44 trillion.

The company took a charge of $450 million to support stable value funds whose net asset value had fallen below their $1 per share target. Many investors own the funds in lieu of cash.

State Street also said revenue may be unchanged this year after 8 percent to 12 percent annual growth in recent years.

"For State Street, this is the worst news we've ever seen in a day by far," said Gerard Cassidy, an analyst at RBC Capital Markets. "Results were very disappointing."

In an interview, State Street CEO Ronald Logue linked the share price decline "to the story of unrealized investment losses, which is so overpowering," but he said State Street's fundamentals are sound.

Last year, State Street got $2 billion from the government's $700 billion Troubled Asset Relief Program (TARP). Logue said State Street has no plans to raise new capital, and has not decided whether to follow other banks in reducing its dividend.

BANK OF NEW YORK MELLON

Quarterly profit at New York-based Bank of New York Mellon fell to $61 million, or 2 cents per share after preferred stock dividends, from $520 million, or 45 cents, a year earlier.

Results reflected a charge of 65 cents per share resulting from $1.24 billion of securities writedowns, largely for debt tied to riskier "Alt-A" mortgages.

Excluding the writedowns, operating profit was $53 million, or 5 cents per share, the bank said. Revenue fell 24 percent to $2.89 billion. Results also included a charge of 9 cents per share for severance and other charges tied to job cuts.

Analysts, on average, expected profit of 70 cents per share on revenue of $3.81 billion. It was not immediately clear on what basis the analysts computed their estimates.

Revenue from securities servicing fell 7 percent to $1.46 billion, while asset and wealth management fees dropped 26 percent to $657 million.

Custodial assets fell to $20.2 trillion from $22.4 trillion three months earlier, while assets under management fell to $928 billion from $1.07 trillion.

Shares of State Street closed down $21.46 to $14.89, while Bank of New York Mellon fell $3.96 to $19, both on the New York Stock Exchange. Bank of New York fell another 70 cents in after-hours trading.

The broad-based Standard & Poor's Financial Index <.GSPF> sank nearly 17 percent to a 14-year low.

(Reporting by Svea Herbst-Bayliss and Jonathan Stempel; editing by Jeffrey Benkoe)