As the country's two largest custody banks wait for interest
rates to improve to spur organic growth, both continue to jockey
for position as the industry consolidates.
Bank of New York Mellon Corp. [BK] gathered significant scale
with a pair of deals in the past four months, but State Street
Corp. [STT] is looking for more deals this year.
In the first quarter, BNY Mellon edged ahead when it announced a
deal to buy PNC Financial Services Group Inc.'s [PNC] Global
Investment Servicing Inc. business unit, which would make BNY
Mellon the second largest provider of fund accounting,
administration and transfer agency and the third largest provider
of alternative-fund assets under administration when that deal
Joseph L. Hooley, State Street's chief executive officer,
expects more deals.
"Unless you are at a certain scale, it is hard to drive growth
and reinvest in the business," he said in an interview Tuesday.
"Scale is going to be increasingly important. I think subscale
providers will decide over time to consolidate."
Todd Gibbons, BNY Mellon's chief financial officer, said in an
interview Tuesday that he doesn't see any other major deals on the
horizon for the large custody banks. He said BNY Mellon would
consider "geographic or product capability fill-ins," but "there is
nothing else out there, frankly. I mean, there could be something
in the asset management space, but I just don't see anything else
substantial, right now."
Despite this skepticism, Robert Kelly, BNY Mellon's chairman and
chief executive officer, said during the company's quarterly
earnings conference call on Tueday that it plans to raise $700
million in equity that will be used to "fund purchases and give us
"Clearly, our capital ratios are stronger than we'd have
expected a quarter ago, but to maintain a strong balance sheet" we
need to raise more, he said. BNY Mellon plans to use the capital to
grow organically and to fund smaller deals, he said.
Kelly admitted, "I would think we are more or less done for the
year except perhaps something small outside of the U.S."
Hooley, who assumed the top post at State Street on March 1
after Ronald E. Logue retired, said it plans to continue to target
"high-growth" segments, including alternative asset management, and
deals outside of the United States.
"We are not necessarily looking for large deals or smalls, but
at clearly defined strategies," he said. "We are offering a broad
range of services across the globe. When there are opportunities to
make an acquisition, we plan to be aggressive."
Analysts said both companies have spent the past year trolling
for bargains, but BNY Mellon has been more successful thus far
because of the deal with PNC. While it announced deals for PNC's
Global Investment Servicing in February and BHF Asset Servicing
GmbH from BHF-Bank Aktiengesellschaft in March to become the second
largest asset servicer in Germany, State Street announced two
overseas in December to buy Intesa Sanpaolo securities services
business for $1.87 billion and a European fund administrator,
Mourant International Finance Administration that is based in
Jersey in the Channel Islands to expand its alternative servicing
Both of BNY Mellon's deals are expected to close in the third
quarter. For State Street, the Mourant deal closed April 1 and
Hooley said he expects the Intesa deal to close in the third
quarter. "All of these deals, and any future ones, are going
to enhance our capabilities over time," Hooley said. "You are not
going to immediately see an impact on quarterly results, but over
time they are going to give us opportunities to cross sell and add
Nancy Bush of NAB Research LLC said that BNY Mellon's deal with
PNC is "clearly a defensive move." She said other custody banks,
specifically Northern Trust [NTRS], "would like to have scale in
fund accounting and" Global Investment Servicing "was the only
vehicle of any size let to them."
Gerard Cassidy an analyst at Royal Bank of Canada's RBC Capital
Markets said that BNY Mellon "didn't pay a Filene's Basement Price"
for Global Investment Servicing "but they didn't pay a Nieman
Marcus price either." He said BNY Mellon got a better deal than
State Street did when it bought the securities servicing business
BNY Mellon's first-quarter earnings rose 74% to $559 million, or
46 cents a share. After a 10 cent charge for increased litigation
reserves, analysts expected the company to report a profit of 43
cents, according to Thomson Reuters.
Gibbons said the surge in assets is a result of securities
losses in the first quarter of last year. He said that BNY Mellon
had moderate securities gains this quarter and "asset management
continues to gain nicely."
"It feels like the credit environment is improving," he said.
"Credit quality continues to improve."
Robert Kelly, the company's chairman and chief executive
officer, said during the company's earnings conference call that it
was an "encouraging quarter."
State Street's first-quarter profit increased 4% to $495
million, or 99 cents a share, from a year earlier as revenue rose
15% to $2.3 billion. Analysts surveyed by Thomson Reuters expect a
profit of 75 cents on revenue of $2.18 billion.
Both companies said that the low-interest-rate environment
remains a challenging hurdle as they look to generate fee revenue.
BNY Mellon's fee revenue increased 5% to $2.56 billion from a year
earlier. Net interest revenue declined 1% from a year earlier to
$765 million, but rose 6% from the previous quarter.
"Our business model is levered to rates levering up," Kelly
said. "We haven't seen that yet."
Hooley called 2010 a "transition year."
"As the economy recovers and unemployment rates improve and
consumer confidence improves, we expect interest rates to tighten
and that will be good news for us," he said. "In 2010, we are
trying to drive growth and share gain in our core business. When
this cycle passes, we expect market driven revenues to return to
more normal volumes and levels. This environment is not unexpected
given the trauma of the last few years."
"A move toward more normal market conditions is going to help
all of our businesses," he said.
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