Mellon Financial Corp.’s efforts to expand its wealth management business showed signs of paying off Wednesday, when it posted stronger-than-expected third-quarter profit growth.
The Pittsburgh company’s top executives said that it will continue to invest in that business line.
Mellon said third-quarter earnings rose 14% from a year earlier, to $222 million, or 54 cents a share, beating the average of analysts’ estimates by 2 cents, according to Thompson First Call.
Revenue rose 13%, to $1.17 billion, and assets under management jumped 20%, to $918 billion.
Robert Kelly, Mellon’s chief executive officer, said during its quarterly earnings call that his company was not done allocating additional resources to wealth management.
“The problem is we have underinvested” in the business in previous years, Mr. Kelly said. “We are playing catch-up in terms of the number of salespeople we have, the technology, and the locations we are in. … [We] have the proverbial pedal to the metal in terms of opening new offices, hiring salespeople, and improving our online systems capabilities.”
There are “key locations that I’d like to be in that we are not in,” he said. “The reality is most of our growth will be organic, and we will focus that way.”
There is plenty of market speculation that Mellon is working toward making a significant acquisition, Mr. Kelly’s comments about organic growth notwithstanding. Since he joined the company from Wachovia Corp. in February, Mellon has bought the Scottish investment company Walter Scott & Partners Ltd. That acquisition, which closed Oct. 2, added $28 billion of accounts.
Analysts say Mellon is also among the bidders for MFS Investment Management, a Boston unit of the Canadian insurer Sun Life Financial Inc. that has $170 billion of assets under management. (Wachovia also is said to be a bidder.)
Gerard Cassidy, an analyst with Royal Bank of Canada’s RBC Capital Markets, said he expects Mellon to buy aggressively in the foreseeable future to develop its asset management business to “drive earnings growth faster and higher.”
Ron O’Hanley, a Mellon vice chairman and the president of Mellon Asset Management, said any acquisitions would need to have certain characteristics.
“We don’t need to do an acquisition in order to grow,” he said. “If we do them, they have to add distribution in some way … or give us capabilities distinct from what we have.”
Mr. Cassidy said the growth strategy at MFS fits well with the value-oriented strategy of Mellon’s Boston Co. “These two companies fit hand in glove.”
However, Mr. Kelly said that he does not expect Mellon to make acquisitions to move into new business lines.
“If we have businesses that aren’t a strategic fit for high growth, or they don’t feed other businesses, you have to think long term, especially if they eat a lot of capital,” he said.
Mellon sold its human resources outsourcing business in May 2005, and in August it announced that it would sell its insurance premium finance businesses, Afco Credit Corp. of New York and Cafo Inc. of Toronto, to Branch Banking and Trust Co. of Winston-Salem, N.C. That deal is expected to close this year.
For the third quarter, asset management fees jumped 20% from a year earlier, to $574 million, and assets under custody rose 16%, to $4.4 trillion. Mellon gained $32 billion of assets during the quarter, more than double the $15 billion it added a year earlier.
Mellon’s stock rose 2.9% Wednesday, to $39.42 a share.
