BNY Mellon more valuable with asset management unit spun off: Analysts

At annual meeting, CEO faces down analysts who say shareholders would gain more value if the big bank broke off Mellon

Apr 11, 2014 @ 1:13 pm

By Trevor Hunnicutt

bny mellon, pershing, mellon, michael mayo, stock, earnings
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Securities analyst Mike Mayo

Top brass at the Bank of New York Mellon Corp. are facing down questions about whether to spin off its asset management unit.

At its annual shareholder meeting Tuesday, the bank's chief executive faced direct questions about whether to sever its investment management unit from the rest of the firm. The unit includes Dreyfus-branded funds, a major institutional asset management operation and a private wealth management business, which managed $86 billion last year. The mutual funds held $425 billion, and the institutional business held $1 trillion.

In an exchange that at the meeting in New York, two securities analysts questioned whether the bank might consider ridding itself of the division.

“Why wouldn't the sale of asset management add value to the firm?” asked Mike Mayo, an analyst for CLSA.

“You've followed us for a long time and you know we're not afraid to take action,” chief executive and chairman Gerald L. Hassell shot back. “We think investment management and investment services together is highly complementary. It does, in fact, serve the same client base.”

Mr. Hassell said the firm's institutional clients have been driving a major portion of the firm's growth and that fee-based nature of the business is actually helping the firm compensate for low interest rates, which have depressed a key source of revenue for banks.

“We don't see a benefit at this point in time in terms of the valuation that might be created hypothetically through a spinoff or separation of investment management and investment services,” he said. “We've done the math — we've done it several times — we continue to look at it.”

Mutual funds are also an important driver of fee-based revenue for the firm. Despite the relatively smaller asset levels, mutual funds accounted for more than a third of BNY Mellon's fees from investment management last year. The private wealth management segment accounted for nearly a fifth of those revenues. BNY Mellon said it drew $100 billion in net inflows last year.

But analysts have said regulatory pressure on banks is increasing costs for asset management segments. Mr. Mayo said the firm is generating less revenue with more employees when compared with rival financial firms State Street Corp. and BlackRock Inc. (Mr. Hassell said those businesses enjoy lower costs than actively managed funds because index funds require less manpower.)

At the meeting, Vic Cunningham, an analyst for Third Avenue Management, a major institutional shareholder in BNY Mellon, asked the chief executive whether some of its businesses “deserve to be maybe set free away from the regulatory shackles that have been placed on your bank.”

(More:BNY Mellon to sell Wall Street headquarters)

Analysts have noted the competitive nature of the retail fund space, with consumers asking active fund managers to prove value and lower costs. Erin Davis, an analyst for Morningstar Inc., a research firm, said in an interview that efforts by BNY Mellon to expand its retail distribution might have little downside, but it might have little upside as well.

“It reeks of desperation,” Ms. Davis said. “I think they just want to find some revenue growth some place, any place.”

Mr. Mayo declined to comment after the meeting.

BNY spokesman Kevin Heine said assets under management, long-term flows and performance fees were all up last year and that the business has posted solid results and expanded its capabilities to benefit wholesale, institutional and retail clients.

The bank is a product of the 2007 merger of Mellon Financial Corp., a major financier of the early U.S. industrial growth, and the Bank of New York Company Inc., founded by Alexander Hamilton, the first U.S. Treasury secretary, in 1784.

Some analysts continue to question whether the value of that merger has been realized in the years that followed, which included both a financial crisis and a strong rebound in stock prices.

But citing increased income in 2013, Mr. Heine said: “We like our business model and it performed well in 2013.” He said the financial crisis and recession both “impacted” the business.

In addition to the asset management services, the firm also includes a services division that includes Pershing, a major provider of platform, clearing, custody and other services to independent advisers and broker-dealers. Pershing works with more than 800 broker-dealers and 500 registered investment advisers, according to the 2014 InvestmentNews DataBook.

Banks are having a mixed start to the earnings season overall. Wells Fargo & Co. reported higher profits Friday, while J.P. Morgan Chase & Co. said its quarterly earnings were down. BNY Mellon reports earnings later this month.

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