Mellon Bank
...it's anything but a mellon
by Dale Wettlaufer ([email protected])
Alexandria, VA (July 21, 1998) --You know, one company that I forgot to put on the long-term list is Mellon Bank (NYSE: MEL). One reason that has been the case is because there had been so much speculative activity surrounding the company that I thought Mellon might not be long for this world as a stand-alone company.
Looking at valuations right now, though, the offer made by Bank of New York (NYSE: BK) was pretty fair. At $90 per share, the premium it offered Mellon was around fair value. Looking over the entire banking sector, it appears as though Mellon is underpriced on the basis of its excellent return on assets, return on equity, and its ability to create free cash flow. Based on peer group analysis, the company should be valued at just about 50% of assets, which would put its share price just north of $23 above the current quote, in line with Bank of New York's offer price.
For those unfamiliar with Mellon, the company is a regional bank based in Pittsburgh and has a number of non-banking subsidiaries that help the company generate an astounding 1.98% return on assets before goodwill amortization. Mellon breaks itself down into four units: Consumer Fee Services, Consumer Banking, Business Fee Services, and Business Banking. The company has nearly 447 banking "stores" and 729 ATMs in Pennsylvania, Maryland, and New Jersey, but that's pretty much only the start of Mellon's business. Its best-known subsidiary is money management company Dreyfus. Along with other money management companies among its subsidiaries, the company had $305 million in assets under management at the end of 1997.
Like other bank holding companies that we like, Mellon is in the business of originating and servicing mortgages, but its operations here are much smaller than its peers. The company has Mellon Mortgage locations in a number of different states, and I would imagine that it did an acquisition to acquire this unit, because two of its top locations by state are Oregon and Washington State.
Other subsidiaries include AFCO, which is an insurance premium finance company that issues lines of credit to businesses that pay down the line of credit over time rather than paying lump-sum insurance policies. For higher-growth companies where return on invested capital is much higher than any premium they might pay for this service, AFCO serves a crucial need. Larger, more stable businesses that probably don't pay as much of a premium as middle-market companies can still take better control of their balance sheet with this sort of financing, which means this unit meets an existing need in the marketplace with a unique product.
Mellon is also a presence in trust, custody, funds administration, and financial data processing with over $400 billion in assets in custody. Like Fifth/Third, this provides the company with a very attractive annuity stream of business with a very low invested capital base. In all, the company really should be considered as a long-term investment, as I don't think we'd be starting at an overvalued position, and I like the company's diversity of operations, risk-adjusted profitability, and absolute profitability.
Here are the numbers on the company, which haven't been updated for today's earnings release, by the way.
(Financials in millions)
Price/Valuation
Share Price.....$68 7/8
Market Cap.....$17,936.22
Price/Book.....4.39
Price/ Tangible Book.....8.27
BVPS.....$15.69
Price/Assets.....37.83%
Price/Net Loans.....60.09%
Price/Deposits.....57.30%
Price/Tangible Assets.....39.42%
Price/Revenues.....4.62
P/E.....24.04
Amortization-Adjusted P/E.....21.00
Discount/Premium to Group.....0.9%
EPS.....$2.86
Cash EPS.....$3.28
Diluted Sharecount.....260.42
1998 EPS Estimate.....$3.23
1999 EPS Estimate.....$3.63
Multiple on 1998 Est......21.32
Multiple on 1999 Est......18.97
Amort-Adjusted Multiple on 1999.....17.03
Discount/Premium to Group.....2.8%
Capital Productivity/Efficiency
Asset Turnover2.....9.00%
Asset Turnover.....8.68%
ROE2.....22.51%
ROE.....19.66%
Amortization Adjusted ROE.....38.32%
ROA.....1.91%
ROA2.....1.978%
Net margin2.....21.98%
Net Margin.....19.20%
Efficiency Ratio.....63.32%
Interest Income/AEA.....6.29%
Interest Expense/AEA.....2.89%
Net Interest Margin.....3.40%
Net Share Buybacks (Including preferred).....$556.0
Dividends on Common.....$331.0
Retention Rate.....61.24%
Payout Ratio on Amort. Adjusted Earnings.....38.76%
Internal Capital Generation Rate.....23.47%
Owners' Yield.....4.95%
Balance Sheet
Cash & Nonearning Assets.....$5,787.0
Cash & Nonearning Last Year.....$4,701.0
Long Term Debt.....$3,003.0
Shareholder's Equity.....$4,086.0
Last Year Equity.....$3,503.0
Tangible Equity.....$2,168.0
Last Year Tangible Equity.....$2,289.0
Tangible Assets.....$45,496.0
Last Year Tangible Assets.....$40,854.00
Total Assets.....$47,414.0
Earning Assets.....$41,627.0
Last Year Assets.....$42,068.0
Total Liabilities.....$42,337.0
Goodwill.....$1,918.0
Last Year's Goodwill.....$1,214.0
Gross Loans.....$30,343.0
Loan Loss Reserves.....$496.00
Loan Loss Reserves %.....1.63%
Leverage
Equity/Tangible Assets.....8.98%
Average Equity/Average Assets.....8.48%
Average Equity/Average Assets (Tangible).....5.16%
Assets/Equity.....11.79
Avg. Assets/Avg. Equity (Tangible).....19.37
Loans to Deposits.....96.93%
LT Debt/Equity.....73.49%
Leveraged Capital Ratio.....6.70%
Tier 1 Capital Ratio.....6.80%
Total Risk Based Capital Ratio.....10.80%
Income Statement
Revenues.....$3,885.00
Interest Income (TTM).....$2,716.0
Interest Expense (TTM).....$1,249.0
Net Interest Income.....$1,467.0
Provision for Loan Losses.....$148.00
Noninterest Income (TTM).....$2,418.0
Noninterest Expense (TTM).....$2,568.00
Net Income for Common (TTM).....$746.05
Amortization Adjusted Earnings.....$854.05
Noninterest income/interest income.....89.0%
Noninterest income/revenues.....62.24%
Noninterest income/NII.....164.83%
Amort. Adjusted Net/Revs......21.98%
Amortization of Goodwill.....$108.00
Credit Quality
Nonperforming Loans.....$133.00
Nonperforming Assets.....$181.0
Loan Loss Provision/Net Interest Income.....10.09%
Loan Loss Provision/Gross Loans.....0.49%
Charge Offs.....$187.00
Recoveries
Net Charge Offs.....$136.00
Nonperforming Assets Ratio.....0.60%
Reserves/Nonperforming Loans.....274.03%
Months Charge-Offs in Reserves.....31.8
Loan Loss Provision/Net Charge Offs.....108.82%
Deposits
Deposits.....$31,305.0
Noninterest bearing deposits.....$7,975.0
Noninterest deposits/deposits.....25.48%
Deposits/Liabilities.....73.94%
Non Jumbo/Jumbo CDs.....2.4
Risk-Based Capital Productivity
ROE2*Tier1.....15.31
Leverage*Turns*Net Margin2.....1.68
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