Previewing 2007: Bank of New York

News that Bank of New York (NYSE: BK) would merge with Mellon Financial (NYSE: MEL) contributed to this year's healthy 27% total return in the custody bank's shares. That strong performance was especially pleasing to shareholders who had grown frustrated while watching BoNY's share price travel sideways for years. With the merger scheduled to be executed in July, what are the prospects for Bank of New York in 2007?

The combination of BoNY and Mellon promises to eclipse the leading custody banks in terms of assets under custody. The Bank of New York Mellon Corp., as the firm will be known, will have more than $16 trillion of assets under custody, compared with the $13 trillion now at JPMorgan Chase (NYSE: JPM), the largest custody bank. The new bank's massive scale will provide significant benefits, including projected expense savings of $700 million for the firm. When the merger was announced, executives from both banks emphasized that they would proceed carefully to avoid a disruptive integration. Their concern for keeping clients helps address one potential apprehension about this deal and should give BoNY investors another reason to anticipate positive results in 2007.

Mellon's substantial asset management business is another reason to look forward to next year. Asset management provides better growth opportunities and stronger profit margins than the asset servicing activities of trust banks. Consequently, firms heavily involved in both asset management and asset servicing businesses, such as State Street (NYSE: STT), have historically traded at richer multiples than BoNY. BoNY shares recently traded at 18 times earnings compared with State Street's multiple of nearly 22 times earnings. BoNY shares could appreciate further as the market begins to recognize the firm's more complex identity and assigns an appropriate premium to the share price.

The Motley Fool CAPS community shares a favorable outlook on BoNY, with 25 outperforms and just four underperform ratings on the stock. Highly ranked CAPS member jfjf88 considers the bank's growing size an asset and says, bring on the volume. Bank executives project that efficiencies will soon lead to an 18% improvement in the pre-tax profit margin.

The Wall Street community seems enthusiastic about the leadership of Robert Kelly, who is CEO of Mellon and will become CEO of the combined firm after the merger. Kelly played a successful role at Wachovia (NYSE: WB) when he helped guide that bank's merger with First Union. That experience, along with Kelly's solid reputation among analysts, should help the firm and its stock stay on track despite any problems that may arise during a complicated integration process. Accordingly, investors have a strong basis for maintaining a positive outlook for BoNY shares in 2007.

For related Foolishness:

• King of Custody
• Muddled Mellon
• Bank of New York's Growing Pains

Check out the other companies featured in " The Motley Fool's 2006 in Review and 2007 Preview " special.

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Fool contributor Michael Leibert welcomes your feedback. He owns shares of Bank of New York. The Motley Fool has a disclosure policy.