Mellon Seeks Balance as Asset Management Soars

Within Mellon Bank Corp., senior executives are engaged in an ongoing debate: Should the company continue to call itself a bank?

"Bank" implies that its primary business is taking deposits and making loans, but the bulk of the company's revenues-68%-comes from fees, mainly fees for managing people's assets.

Corporate lending, once the bulwark of the venerable banking company's revenues, has clearly fallen out of favor. Loans not only eat up capital and yield relatively low returns but also increase Mellon's risk profile and make earnings more volatile-just the things investors don't like. Calling itself an asset manager might in itself increase Mellon's share price, which closed at $74.125 Tuesday.

But Martin G. McGuinn, who became chairman and chief executive officer on Jan. 1, vows that the $49 billion-asset banking company will remain "balanced."

"We do not see corporate lending as a growth business," Mr. McGuinn acknowledged in a recent interview. Yet he said he wants to preserve Mellon's commercial banking links with big corporations because "of all the products we can sell to them."

Corporate lending, though it strengthens ties with big companies, may be creating a drag on Mellon's short-term earnings, which are among the highest in the industry. Its return on equity exceeded 20% during the last three years, and in 1998 it was the sixth most profitable of the nation's 50 largest banking companies, according to Keefe, Bruyette & Woods Inc.

Mr. McGuinn also sees commercial banking as an important counterweight to its asset management business that will help sustain earnings if the stock market hits a sharp downturn, reducing asset management fees.

"We want to maintain some flexibility," said Mr. McGuinn. "The balance is going to position us extremely well."

He is seconded by Christopher M. Condron, president and chief operating officer, who runs the asset management side of the company. Mr. Condron acknowledged that Mellon's executives have debated whether they should use the word "bank" to describe the company's overall business, yet he agreed with Mr. McGuinn that the bank should not put too much emphasis on asset management.

Maintaining a balance will be among Mr. McGuinn's toughest challenges because he is already tilting toward money management and investment banking and away from commercial lending, credit cards, and mortgage banking.

Within two weeks of becoming CEO he put three businesses up for sale: credit cards, teller machine processing, and the mortgage operation. And he plans to use much of the proceeds for acquisitions, primarily in asset management and safekeeping.

Clearly, though Mr. McGuinn talks of balance, his heart is not with commercial banking. He boasts of Mellon's $400 billion of assets under management and its $2.3 trillion of assets under administration, management, or custody; he barely mentions Mellon's $49.4 billion of banking assets, less than one-tenth the total at the nation's two largest banking companies.

Some analysts, such as Joseph Duwan of Keefe Bruyette, attribute a part of Mr. McGuinn's drive to last year's abortive takeover attempt by Bank of New York Co. Mr. Duwan said the hostile bid galvanized the Pittsburgh company, prompting it to focus on its core businesses.

"We have a strategy, and it's different from Bank of New York's strategy," says Mr. McGuinn. "We're able to execute that strategy. We don't think that somebody else, including Bank of New York, can." Mr. McGuinn asserts that his strategy will make Mellon, which earned 20.8% on equity last year, even more profitable.

As early as last year, Mellon began entering partnerships here and abroad to build asset management revenues. It bought 75% of London-based asset manager Newton Management Ltd. and now is in discussions with Paris- based Credit Lyonnais regarding an equity stake in the French bank. Mellon reportedly wants to sell its asset management products to Credit Lyonnais customers.

Mr. Condron said he sees particularly good opportunities in Europe, where families are beginning to build nest eggs for retirement. "There's an opportunity for the growth of the asset management business on the institutional side," he said.

On the investment banking side, Mr. McGuinn said, Mellon would consider buying a retail brokerage if it could find a complementary firm. "That's appealing because it would fit what we think is a specific need, serving our middle-market customers," Mr. McGuinn said. "We have a number of discussions going, but finding the right partner at the right price is a challenge. We'll continue to look."

As for acquisitions in general, Mellon "is fairly flexible given the strength of our stock and our success to date in both acquiring and, more importantly, executing or integrating asset management," Mr. McGuinn said.

"It really becomes a question of opportunity," he said. "We've done some smaller kinds of things which were good opportunities, and if we can do some medium to larger ones, and they fit all our criteria, then they're very possible."

Indeed, Mr. McGuinn doesn't rule out a merger with a like-sized company, including a commercial bank. "We're all looking at these screens to see who would fit," he said, adding, "it's the conceptual versus the practical." He added that "we want to minimize the execution risk, even assuming a strategic fit. So we're going to be very careful in terms of the kinds of deals we do."

Mr. McGuinn not only is honing Mellon's strategy but also has been changing its management style. His predecessor, Frank V. Cahouet, who was hired in 1987 to save Mellon from financial ruin, ceded little power to his managers, analysts say. Mr. McGuinn, by contrast, appears to be sharing much of his authority with Mr. Condron and Steven G. Elliott, senior vice chairman and chief financial officer.

Meanwhile, Bank of New York's attempt to buy Mellon last year remains a reminder to the management team that the company is susceptible to takeover. "Independence is not an end in itself for us," said Mr. McGuinn. "It's a means to an end, and it's a means to the end which is serving our customers, therefore our shareholders, well."

That's a good motto, say analysts, but more important is that Mellon continue to improve its performance.

"Institutional investors still have a fair amount of bitterness over Mellon's summary rejection" of Bank of New York's $82-a-share bid," said James Schutz, an analyst at ABN Amro Inc. "Senior management is very aware of that."

Some of those investors believe the stock price of a combined Bank of New York-Mellon would be $90 a share now. Mellon has been trading in the low $70's. Though the $90 estimate is imprecise, "that's the bogey right now," Mr. Schutz said.

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