Mellon puts some flesh onto a BoNY structure

With this year’s annual Christmas deal now complete, the map of the top US financial institutions changed with the ann­ouncement that two of the oldest banks in the US were coming together. The merger between The Bank of New York (BoNY) and Mellon Financial Corporation in a $16.5bn (e12.8bn) deal to create the world’s largest custodian bank and the US’s fifth-largest money manager came before the dust had even begun to settle on Bank of America’s purchase of US Trust. The combined bank will be 63 per cent controlled by BoNY shareholders with BoNY also contributing 10 out of 18 of its directors. It will be based in New York. It is BoNY’s second attempt to get Mellon, having seen its hostile bid rebuffed in 1998. This time, the cheaper deal to create BoNY Mellon has met with unanimous approval, as it simultaneously solves BoNY’s search for increased assets under management and Mellon’s need to raise its assets under custody. BoNY Mellon will have $16,600bn in assets under custody and $1,100bn in assets under management. Clearly the main thrust of the deal is institutional as the world’s largest asset servicing provider. But, the combination of BoNY’s securities servicing and technology with Mellon’s broad asset management capability will likely see private client asset managers high on the list of target clients for the merged firm. Active cross-selling by Mellon between securities servicing and asset management already generates $1bn in revenue. However, to date, despite its strong positioning as a custodian to the wealth management market, BoNY has been unable to tap this opportunity because of its limited asset management capability. In terms of direct wealth management, the merger will also create a new force to be reckoned with. BoNY Mellon’s Wealth Management division will be led by Dave Lamere, now head of Mellon’s Private Wealth Management business. It will have around $152bn under management, making it the seventh-largest US wealth management players (see table). The Asset Management & Wealth Management division of BoNY Mellon will be one of four business lines of the new bank. Of note, it will also be the largest revenue contributor of the four with annual earnings of $3.6bn, equivalent to 31 per cent of pre-tax earnings. The other divisions are asset servicing, treasury & clearing services and issuer services. Mr Lamere has indicated that the main priority of the wealth management division will be to retain clients. He also indicated that clients will benefit from an expanded network of branches and investments. Both firms are currently almost exclusively focused on the domestic US market. While Mellon recently announced the launch of a family office business in London, its network of 17 branch operations across the US is the core of its business. BoNY Private Bank meanwhile is exclusively focused on the US wealth market via its network of branches in six major US wealth locations. Thus the main benefit of the deal for wealth management in the short term will be the expanded product capability of the merger. Mellon’s product capability has been characterised as a “multi-boutique” strategy, with a number of specialist subsidiaries working across the asset management spectrum. However, its strongest reputation is in the traditional asset classes, mainly due to its Dreyfus mutual fund line-up. BoNY meanwhile has been building out its alternatives strength, notably in real estate and private equity through its acquisition of Urdang Capital Management and Urdang Securities, in funds of hedge funds through Ivy Asset Management, and in structured credit through Alcentra Group. Catherine Tillotson is a partner and head of research at wealth management strategy think-tank Scorpio Partnership