Change has been afoot this year at Mellon Financial
Mellon's performance, however, remains less than it could be. Radical change in the bank's structure is needed to make Mellon an attractive investment relative to the stocks of certain competitors. Robert Kelly, the new CEO, should reevaluate the strategy that brought together asset management and securities processing at Mellon.
Mellon earned $0.53 per share in the third quarter, one cent above analysts' consensus estimate and 15% better than the results from a year ago. The improvement was driven largely by the growth in assets under management, which increased 20% to $918 billion. Mellon Asset Management, which handles retail and institutional funds, and Mellon Private Wealth Management, the private banking unit, generated approximately 70% of total income before taxes.
In addition to a strong growth rate, the business of managing clients' money is attractive for the high investment returns it generates. Mellon Asset Management had a return on equity of 50% in the third quarter compared to the 31% return generated by the company's Asset Servicing unit. Investment managers tend to earn higher rates of return on invested capital than the average company in the sector.
Mellon is quick to point to substantial growth from the previous year in assets under custody or administration, a measure of activity at the Asset Servicing unit. But Mellon's ranking among securities processing firms remains stuck behind industry leaders like JP Morgan Chase
Mellon's management has defended the bank's current structure by arguing that asset servicing and asset management are complementary functions. Asset servicing reduces the impact of bear markets on Mellon's earnings and likely shields the stock from the volatility that affects the high beta stocks of asset managers like T. Rowe Price
Nevertheless, the market continues to reject the wisdom of management's reasoning. In spite of the size and success achieved by Mellon's asset management unit, the firm's shares trade at a P/E multiple comparable to other custody banks rather than at the more robust multiples that other asset managers enjoy.
Mellon's management recognizes the value of developing its asset management business. Rumors had been circulating that Mellon wanted to buy the Boston-based advisor MFS Investment Management from its Canadian parent Sun Life
For related reading:
- Should Investors Thump This Mellon?
- JP Morgan Chase Makes the Turn, Sort Of
- Bank of New York Focuses on Profits
JPMorgan Chase is an Income Investor recommendation. Affiliated Managers Group is a former Stock Advisor pick.