Acknowledging State Street Corp.’s (STT) improvement in capital and liquidity position, on Tuesday, Fitch upgraded some of the ratings for the company. Fitch Ratings raised the individual and preferred stock ratings of State Street and subsidiary State Street Bank and Trust Co. to “B/C” from “C” and also lifted the preferred stock rating of State Street’s trust preferred subsidiaries one notch in investment grade status to “BBB+” from “BBB”. However, Fitch maintained the issuer default ratings of State Street and its subsidiaries at “A+/F1+”.

The favorable Fitch ratings reflect the company’s stability in its capital position and the cash reserves which have also enhanced its liquidity position. Moreover, the increase in the tangible common equity (TCE) ratio to 5.7% of tangible assets in the third quarter from 5.0% in the second quarter also inspires confidence. These TCE ratios compare well with those of State Street’s commercial banking peers such as JPMorgan Chase & Co. (JPM), The Bank of New York Mellon Corp. (BK) and Northern Trust Corp. (NTRS) in the new individual rating category and are in excess of management’s stated long-term objective of 4.25% to 4.75%. Management is expected to maintain above-range capitalization ratios for the next few quarters.

We believe that government aid and strong core servicing and investment management franchises will help State Street offset the volatility caused by the global economic turmoil, thereby providing buoyancy to the company’s balance sheet and growth outlook in the medium to longer term.

On another note, to expand its global fund administration and alternative servicing operations, State Street announced on Tuesday its intention to acquire Intesa Sanpaolo, an Italy-based securities services group, for about $1.87 billion in cash. Although the terms remain undisclosed, the deal is expected to close by second quarter of 2010.

State Street anticipates about $120 million in acquisition-related costs over a five-year period, with most costs taking place in the first three years. However, it also projects saving about $90 million over five years, anticipating the deal to be modestly accretive to 2010 earnings.

The amalgamation of Intesa will strengthen State Street’s capital position by about $800 million. The company will also enter into a long-term investment servicing arrangement with Intesa to service all of its investment management affiliates Incorporatedluding Italy’s biggest fund manager, Eurizon Capital. This will be a perfect icing on the cake.

On Tuesday, the shares of State Street closed at $43.86, up 4%, on the New York Stock Exchange.

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