Bank of New York Mellon Corporation (BK)

Net interest income rose 11.3% rise in average interest-earning assets in 2006. There was a 23 basis point increase of the firm’s net interest margin, much of which was from non-interest bearing deposits acquired with JPMorgan’s corporate trust business.

BNY has gradually become a more careful rationer of credit than most banks though its first loan, made in 1787, was $200,000 to the new and then-risky US government.

Assets under custody rose to $13.8 trillion in 2006, which represents a 22% gain from the prior year and a 6% sequential advance. Assets under custody will rise to $16.6 trillion and assets under management will climb 10-fold assuming the completion of the Mellon merger.

Clients/customers of custodial services will most probably not desert BNY nor Mellon because of the merger because changing custodian costs too much time and labor. Given the BNY’s history of price competitiveness, this merger should contribute to BNY’s pricing competitiveness.

It is possible that BNY could be acquired by a much larger institution. A few years ago, Wall Street rumor had it that Deutsche Bank was interested in buying BNY. Given its capitalization is just $31 billion and given that the European economies are getting stronger even as the US economy slows, a takeover bid could appear if these two trends continue. Though the 20th to 25th largest bank in the US ranked by assets or deposits, its earnings are one tenth those of several of the world’s largest banks.

Takeovers are usually effected by offering a significant premium to a company’s current stock price. Investors might accept an offer if it were 25% to 35% more that the current stock price of 39 to 40, say 50 to 55. For a larger global entity, particularly one interested in a long-term US investment in a business controlled by an informal but very real small oligopoly based in size, BNY could be an attractive long-term investment.

Shifting the bulk of BNY’s earnings from credit risk businesses to fee-based services removes earnings interest rate sensitivity, interest rate risk, and dampens share price volatility.

Most analysts believe the increase in asset in custody offer a superior platform for cross-selling asset management. However, asset owners will probably meet such efforts with a cold shoulder. They assume that their transactions are no one else’s business. Usually, asset managers will rebuff cross-selling efforts if they believe these efforts were inspired by knowledge of their recent transaction history. Investors should not expect growth in asset under management assets to come from cross-selling.