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 Bank of New York Mellon (NYSE: BK) is a leading provider of financial services for institutions, corporations and individuals. On December 31, 2007 it had over $23 trillion in assets under custody and administration, more than $1.1 trillion in assets under management and had served $11 trillion in outstanding debt. Bank of New York Mellon is the result of the July 1, 2007 merger of Bank of New York and Mellon Financial. The merger was recorded as a purchase of Mellon by Bank of New York for $17 billion. The company expects annual expense synergies of $700 million by 2010 and revenue synergies of $250-$400 million by 2011. Bank of New York Mellon provides its clients with asset and wealth management, asset servicing, issuer services, clearing and execution services, and treasury services in over 100 markets by over 40,000 employees. [1] Bank of New York Mellon combines two complementary banks: Bank of New York, known for its global securities processing, and Mellon, known for managing pension funds, mastering the tech side of that field. Bank of New York Mellon is challenged to face the practicalities of its merger, focusing on client retention and developing and exploiting synergies. It has avoided the subprime mortgage crisis but is sensitive to the crisis’ broader economics implications, including changing interest rates and the overall health of the global economy. Compared to other banks, its fee-based revenue model gives it some protection from these changing forces making it less dependent on interest rate spreads or credit quality of loans.
[edit] Business OverviewBank of New York Mellon divides its services into six categories: asset management, asset servicing, wealth management, issuer services, treasury services, and broker dealer & advisor services. Increasingly since its asset swap with JP Morgan Chase in 2006 and its merger with Mellon Financial in 2007, Bank of New York Mellon has been able to develop synergistic services, indicated by its $130 million[2] reduction in operating expenses in the fourth quarter of 2007. Over the same period, it has moved more toward a fee-based model for revenue. The merger saw Mellon Financial’s over $1 trillion in assets under management couple with Bank of New York’s majority market share in depository receipt services, which diversified the firms assets and offered more services to both firms' existing clients.
As a result of the merger, Bank of New York Mellon nearly doubled it revenue from 2005-2007, though net income growth was not commensurate, mostly due to costs associated with the merger. In the first quarter of 2008, unrealized losses in Bank of New York Mellon’s investment portfolio increased to $1.8 billion, though the losses only amount to $2 per share.  From 1997-2007, Bank of New York has acquired more than 80 other companies, taking advantage of the consolidation trend of securities processing companies. In 2003, the Bank of New York acquired Pershing LLC, a provider of correspondent clearing service for broker/dealers, asset managers and other financial intermediaries. In 2006, JP Morgan swapped their corporate trust unit for Bank of New York Co.'s retail and small and middle business banking network, a deal the removed incongruencies in both firms.
[edit] Trends & Forces[edit] Technology And Access to Global MarketsBank of New York Mellon is a leader in Global securities processing, an investment sector that grew out of changed legislation and increasing access to the global economy. In the 1980s, global securities processing became important for a few US banks who were investing increasing pension fund assets. ERISA (Employees Retirement Income Security Act, 1974) stated that pension funds could legally invest in non-US assets. Concurrent developments in modern portfolio theory encouraged pension fund managers to invest globally, thus diversifying their portfolios. Thus there was an increased demand for custodians that could collect interest and dividends from securities traded in any market and denominated in any currency. Changing standards for securities processing, encouraged by an international committee in 1989 set forth developments in electronic clearing and easy money policies that simplified and standardized global securities processing. Moreover, industrial and financial growth in Russia in the 1990s encouraged Global securities processing. In the 1990s and 2000s, technological advances have allowed for increasing access to global securities, increasing their viability as investing opportunities. Both Bank of New York and Mellon Financial were leaders in seeking foreign investments for their pension funds, with Bank of New York specializing in global securities processing and Mellon popularizing the Master Trust, or pooled investments to get wholesale rates and prices. [edit] Interest RatesThe effects of interest rates, often thought of as the cost of borrowing money, are far reaching and affect the domestic and international economy. Businesses are particularly sensitive to interest rates because as the cost of borrowing increases, demand falls. Thus, lenders like the Bank of New York Mellon are affected by interest rates. However, unlike many commercial banks, Bank of New York Mellon’s revenue model is fee-based, meaning it is less dependent on interest rates. Between 15% and 20% of the firm’s revenue is expected to come from interest income[5], a limited but still significant portion. Like other banks, Bank of New York Mellon is highly leveraged compared with nonfinancial firms, contributing to its sensitivity to interest rates. [edit] Effect of Merger on CustomersThe merger between Bank of New York and Mellon Financial created synergies that cut operating costs and turned two players who often compete over prices into one player. However, mergers often have effects on the customers of the combined companies. While Bank of New York Mellon hopes to retain its costumers, historically costumer attrition rates have been seen as high as 10% in the State Street – Deutsche Bank merger. Further, Bank of New York had worse customer service than Mellon Financial, which will affect customer approval. Positives do exist, as customers of the combined companies now have increased access to each others’ services, meaning that custommers will be willing to invest more with Bank of New York Mellon’s increased services. Moreover, the access to these newly joined services will attract new investors to the firm. [edit] The Yield CurveThe yield curve represents the interest rate as a function of the term of debt. Banks charge higher rates for long-term debt than short-term debt. A flat yield curve, implies very little premium for long term debt. When economic conditions force the yield curve into a flat position, banks are vulnerable as the profitability of loans is diminished. Bank of New York Mellon is less susceptible to fluctuations in the yield curve, since its fee-based revenue model is less affected by rate changes. [edit] CompetitionCitigroup (NYSE: C) Given its size and its global presence in over 100 countries, Citigroup should be Bank of New York Mellon’s biggest competitor. However, clearing, settlement and custody of securities are far more complicated than transferring cash and Citigroup seems not to be focused much on this business. While large and powerful, Citigroup but should not be seen as a major competitive threat. J P Morgan Chase & Co. (NYSE: JPM) Chase was the first of US global custodians, and, in fact, defined the term in 1974. Since then, the bank has maintained its position as the leading global custodian until the late 1980s and early 1990s. However, like Citibank, it has many other businesses. Its swap with Bank of New York of its corporate trust asset for Bank of New York’s middle-market banking unit leads one to speculate that Chase’s current management does not value financial asset services highly. Should JP Morgan Chase’s giant lending and credit card businesses turn south, putting significant pressure on the profitability of its lending income, it is easy to imagine JPMorgan Chase selling some it its custody businesses.  State Street Corp. NYSE: STT) Formerly a third tier New England bank, State Street transformed itself in the 1970s to one of the world’s leading securities processing banks. It later became one of the US’s largest asset managers with $1.7 trillion assets under management at the end of 2006.
[edit] Web Links[http://www.forbes.com/business/2007/05/17/bony-russia-lawsuit-biz-services-cx_lm_0517suit.html Forbes on Russian lawsuit] Bank of New York Mellon Annual Financial Report 2007, Form 10-k [edit] References
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