Mellon Bank Corp. said Friday that it would sell its mortgage, credit card, and transaction processing businesses to devote more resources to its highly profitable mutual fund and investment management operations.
The $50.4 billion-asset Pittsburgh banking company said it would plow proceeds of the sales into growth businesses, acquisitions, and share buybacks. The card portfolio is expected to fetch the highest premium-an estimated $250 million.
"We are really sharpening our focus," said Martin G. McGuinn, Mellon's chairman and chief executive officer. "We don't have to manufacture everything."
The announcement coincided with the release of fourth-quarter earnings of 84 cents a share, in line with Wall Street's consensus forecast. Mellon said profits jumped 16%, to $222 million, on a 13% gain in fee income. Fees of $799 million made up 68% of total revenues.
Revenues from trust and investment management carried the day, growing 19%, to $465 million.
Meanwhile, fees from mortgage servicing fell 14%, to $48 million, and fees from credit cards dropped 8%, to $22 million.
"Their emphasis since Dreyfus has been to shift the mix of earnings away from traditional banking and toward fee income businesses like trust and mutual funds," said Lawrence Cohn, an analyst at Ryan, Beck & Co.
Mellon said that by divesting its mortgage and card operations it would lower risk in its lending portfolio. The sales are expected to reduce balance sheet assets by $4 billion, the bank said.
The three units represent about 2,200 employees, about 1,460 in mortgages, mostly in Houston and Denver. Mellon said layoffs are possible, but would depend on the acquiring companies.
Analysts said the planned sales signaled that Mellon's new management intends "to take some steps to improve what has already been terrific performance," said George Bicher, an analyst at BT Alex. Brown.
Mr. McGuinn succeeded retired chairman Frank V. Cahouet on Jan. 1.
"They are moving into a period where they are trying to optimize what they have," added Michael Mayo, an analyst at Credit Suisse First Boston.
Like other banks, Mellon is opting out of scale-driven businesses where its market share has eroded, to concentrate on areas where it can more easily excel.
For Mellon, that is clearly investment management. The bank has spent much of the last five years aggressively building its asset management and mutual fund capabilities, transforming itself from a traditional regional bank into an investment services powerhouse.
In 1993, Mellon bought the Boston Company, which specialized in custody and private client services. In 1994 it acquired Dreyfus Corp., a deal that catapulted the bank to the top ranks of bank mutual fund managers.
The bank has $2.2 trillion of assets under custody and administration, including $390 billion under management. It ranks as the leading bank manager of retail fund assets, with $120 billion in its portfolio.
Mr. McGuinn, in an interview Friday, said the Dreyfus and Boston Co. acquisitions gave Mellon "very strong market positions."
The divestitures "will focus management's attention and resources to those businesses, where we have scale and where we can get the best returns."
Mr. McGuinn also identified global cash management services, trust and custody, and commercial leasing as growth businesses in which Mellon will invest.
"We will continue to proceed with acquisitions and dispose of certain businesses," he said.
Mellon's market positions in the three businesses currently on the block were small relative to competitors. Though Mellon's $78 billion commercial and residential mortgage portfolio ranks among the top 20, it is dwarfed by the $232.7 billion portfolio of market leader Norwest Mortgage Inc.
The sale of the business is not expected to result in a material gain for Mellon, analysts said.
Its $1.9 billion in managed card receivables is far behind the $68 billion managed by Citigroup. It ranks eighth in network services for automated teller networks, with 2.3% market share.
Mellon will keep its $3.9 billion jumbo mortgage business, which is marketed nationally through the Boston Company. Jumbo mortgages are an attractive business, appealing to the bank's core base of private banking and private asset management customers, the bank said.
Mellon has shed units over the last 18 months. In late 1997 it sold its corporate trust business to Chase Manhattan Corp. Last month it sold its merchant card processing unit to Paymentech USA, a subsidiary of Bank One Corp.
The bank said it hoped to finalize the sales by the end of the third quarter, upon regulatory approvals.
Goldman, Sachs & Co. will advise Mellon on the sale of the mortgage and credit card portfolios. Morgan Stanley Dean Witter & Co. will advise the bank on the sale of Network Services.
For the full year 1998, Mellon said profits rose 14%, to $861 million, or $3.25 per share. +++
Mellon Bank Corp. Pittsburgh, Pa. Dollar amounts in millions (except per share) Fourth Quarter 4Q98 4Q97 Net income $222.0 $191.0 Per share 0.84 0.75 ROA 1.76% 1.75% ROE 20.10% 21.20% Net interest margin 3.86% 4.07% Net interest income 382.0 362.0 Noninterest income 799.0 707.0 Noninterest expense 825.0 729.0 Loss provision 15.0 73.0 Net chargeoffs 17.0 106.0 Year to Date 1998 1997 Net income $861.0 $750.0 Per share 3.25 2.88 ROA 1.81% 1.80% ROE 20.70% 21.50% Net interest margin 3.96% 4.24% Net interest income 1,499.0 1,475.0 Noninterest income 2,922.0 2,568.0 Noninterest expense 3,013.0 2,568.0 Loss provision 60.0 148.0 Net chargeoffs 63.0 201.0 Balance Sheet 12/31/98 12/31/97 Assets $50,777.0 $44,892.0 Deposits 34,383.0 31,305.0 Loans 31,597.0 28,667.0 Reserve/nonp. loans 482% 357% Nonperf. loans/loans 0.32% 0.46% Nonperf. assets/assets 0.27% 0.40% Nonperf. assets/loans + OREO 0.44% 0.62% Leverage cap. ratio 6.70%* 8.02% Tier 1 cap. ratio 6.50%* 7.77% Tier 1+2 cap. ratio 10.80%* 12.73% ===
