State Street said it plans to sell $1.5 billion of stock and also sell notes to help repay government bailout funds, and took a $3.7 billion charge to move some assets onto its balance sheet at a loss.
The Boston-based custodial bank and asset manager said it will use proceeds from the securities sales to help repay a $2 billion infusion from the Troubled Asset Relief Program.
It did not specify a size for the debt offering but said it would not be backed by the federal government, a requirement for paying back TARP.
Many banks want to repay TARP funds because of restrictions imposed by the government, including on executive pay, and because holding the funds is viewed as a sign of weakness.
State Street was among 19 large U.S. banks to undergo government "stress tests" of their ability to handle a deep recession, and was among nine found not to need more capital.
The $3.7 billion charge relates to unrealized losses on $22.7 billion of assets from asset-backed commercial paper conduits, a special-purpose vehicle that holds receivables.
These losses have dragged on State Street shares, which have fallen by about half since last July. State Street in February slashed its dividend and reduced bonuses to bolster capital.
The charge will equal about $7.70 per share and will help State Street "ensure that capital issues are behind them," wrote Goldman Sachs analyst Brian Foran. "It makes sense to put the issue to bed."
Shares of State Street rose $1.01, or 2.6 percent, to $39.52 in early trading. Their 52-week high is $74.85, set last July 23. Foran raised his 12-month share price target to $45 from $25.
State Street on Monday projected 2009 operating profit of $4.25 to $4.50 per share, including 75 cents per share from interest revenue from the conduit assets.
Excluding the boost from interest revenue, the forecast is below analysts' average estimate of $3.80 per share, according to Reuters Estimates.
State Street said its forecast reflects a "marginally weaker" environment than expected, and assumes a 12 percent drop in operating revenue and a 17 percent return on equity.
It said it expects to eventually recognize the "vast majority" of the $3.7 billion charge, equal to $6.1 billion before taxes, as interest revenue over time, including $475 million before taxes in 2009.
Custodial banks keep records and provide accounting and other back-offices services to institutional investors. State Street's main rival, Bank of New York Mellon , also hopes to repay TARP soon.
Goldman Sachs and Morgan Stanley are arranging the State Street stock offering.