BNY Mellon Merger ‘Failed’ as State Street Profitable

The 2007 merger that created Bank of New York Mellon Corp., the world’s largest custody bank, failed to deliver higher profits as the company lags behind its biggest rivals, according to Mike Mayo, an analyst at CLSA Ltd.

“The end result has not panned out as well as peers, or would have been expected for a company that says it achieved synergies from its 2007 merger,” Mayo, who covers banks at CLSA in New York, wrote today in a note to clients.

Bank of New York bought Mellon Financial Corp. in 2007, promising “cost savings and revenue synergies opportunities,” Robert Kelly, former chief executive officer of the combined firm, said at the time. BNY Mellon has come under pressure after rival State Street Corp. responded more aggressively to the threat from record low interest rates with investments in technology and job cuts that improved its profitability. Kelly was replaced by CEO Gerald Hassell in 2011.

BNY Mellon rose 0.6 percent to $31.09 at 1:58 p.m. in New York trading. The shares have climbed 21 percent since the end of 2012, compared with a 39 percent jump for Boston’s State Street. Over the past three years, the shares have advanced less than 1 percent, compared with a 41 percent gain for State Street.

Mayo said Hassell has been paid above the average bank CEO despite the fact that shares have lagged behind those of its peers for the past three years. Mayo, who rates the shares “underperform,” also questioned why the bank had named no new board members in 10 years.

Kevin Heine, a BNY Mellon spokesman, declined to comment on Mayo’s note.

Low Rates

Low interest rates hurt custody banks by reducing the returns they make on lending and on their own investments. The U.S. Federal Reserve has held its benchmark interest rate at zero to 0.25 percent since December 2008 in an attempt to stimulate borrowing and economic growth.

BNY Mellon in 2011 said it would cut about 1,500 jobs, or 3 percent of its workforce, and set a target to save as much as $700 million by 2015 through operational improvements. State Street, led by Chief Executive Joseph “Jay” Hooley, has eliminated almost 3,000 jobs in the past three years to reduce costs. It has also invested heavily in computer technology aimed at making its asset-servicing and transaction processing businesses more efficient.

Mayo compared the bank’s performance with State Street and BlackRock Inc., BNY Mellon’s largest competitor in asset management.

‘Plan B’

On a combined basis, State Street and BlackRock have one-fifth fewer employees, 30 percent more revenue and double the pretax earnings of BNY Mellon, Mayo said.

“If results do not pan out as desired by shareholders, then it seems reasonable to ask, ‘Where is plan B?’,” Mayo wrote beneath the heading, “Restructure this bank?”

Bank of New York was founded after the American Revolution in 1784 by former Treasury Secretary Alexander Hamilton. It paid about $18.3 billion for Mellon, the Pittsburgh-based institution that helped finance the steel industry in the early 1900s.

Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. BNY Mellon and State Street also manage investments for individuals and institutions.

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