State Street Corp said it plans to sell $1.5 billion of stock and will 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 said the debt offering would not be backed by the federal government. Issuing such debt is 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 capital-raising is positive, said Murali Gopal, vice president at Keefe, Bruyette & Woods Inc in New York. State Street is taking advantage of a run-up in its stock to raise capital, and who knows how long this run-up will last.

State Street shares have more than doubled since bottoming on January 20 but have fallen by nearly half since last July amid worries about losses from asset-backed commercial paper conduits, a special-purpose vehicle that holds receivables.

The $3.7 billion charge relates to unrealized losses on $22.7 billion of assets from the conduits, which State Street is now moving onto its balance sheet. In February, the bank slashed its dividend and reduced bonuses to bolster capital.

State Street's charge, equal to about $7.70 per share, will help the company ensure that capital issues are behind them, wrote Goldman Sachs & Co analyst Brian Foran. It makes sense to put the issue to bed.

Shares of State Street rose $2.09, or 5.4 percent, to $40.60 in afternoon trading. They have traded in a range of $14.44 to $74.85 over the last year.

Foran raised his 12-month share price target to $45 from $25. KBW's Gopal rates State Street market perform.


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 Corp , also hopes to repay TARP soon.

Goldman Sachs and Morgan Stanley are arranging the State Street stock offering.

(Reporting by Jonathan Stempel; Editing by John Wallace)