Citizens Financial Group, which for the past decade has confined its expansion to the New England market, has finally made good on its pledge to break new ground - and its expansion plans may mean still more acquisitions lie ahead.
On Tuesday the Providence, R.I.-based company confirmed a deal to acquire Mellon Financial Corp.'s retail and small-business banking operations for $2.1 billion in cash. Citizens would enter a new market with the acquisition, which includes 345 branches and $13.4 billion in consumer and commercial deposits in Pennsylvania, Delaware, and southern New Jersey. The deal would also bring $6.1 billion of loans, particularly to small- and middle-market banking customers.
For Citizens, the deal would fulfill a broader ambition of its parent company, Royal Bank of Scotland, which has been itching to expand in the United States. "We had a number of priorities in the U.S., and the highest was to find a purchase for Citizens so it could begin a strategy of market expansion," said Fred Goodwin, the chief executive officer of Royal Bank, in a telephone interview.
"Our success in the U.S. is strongly linked to our ability to grow income," Mr. Goodwin said. "Mellon fit the bill perfectly."
The deal, scheduled to close in the fourth quarter, would make Citizens one of the 20 largest U.S. banking companies. Royal Bank also owns a private bank in Miami and Greenwich Capital, and it has corporate banking offices in New York and Houston. But $32.4 billion-asset Citizens has been a crown jewel, contributing 8% of the company's overall profits largely by sticking to old-fashioned consumer banking.
Mr. Goodwin said he hopes to continue that, adding that he has no plans to create a U.S. financial conglomerate by consolidating Royal Bank's operations in this country. "There is no case to be made for lumping them together," he said. "Our strategy has been to keep focused and disciplined. We are not trying to do rocket science."
Lawrence Fish, the chief executive of Citizens and the person responsible for 17 acquisitions in New England over the past decade, said he wants to replicate that strategy in the markets to be acquired from Mellon. "Our intention is to hit the ground running and grow," Mr. Fish said during a press conference in Pittsburgh early Tuesday. "We will try to do Citizens all over again in this part of the country."
That statement raises the possibility that acquisitions will pick up in the Middle Atlantic states. Citizens would hop over northern New Jersey and New York to get to Pennsylvania, leaving open the possibility of acquisitions in those areas. In addition, the company could look west to Ohio for future targets.
"Our objective with Citizens would be further consolidation," Mr. Goodwin said. "There are a number of obvious areas for expansion. Our priority now is to integrate, and then let's see what the future brings."
The company said it is paying a 16% premium for the Mellon business. Costs associated with integrating the branches and others items are estimated to be about $267 million. Citizens has pledged to retain most of the 4,100 Mellon employees affected by the sale. Mr. Fish said Citizens had not decided where to base its Pennsylvania operations: in Pittsburgh, Philadelphia, or somewhere in between.
For Mellon the deal represents another big step in a decade-long transformation from a regional banking company to one devoted increasingly to asset management and fund servicing. The company said it would record $900 million in gains from the sale of the business in the fourth quarter.
Mellon would retain 19 branches to serve as private banking outposts, but said it would now turn most of its attention to building its asset management and servicing businesses, including by acquisition. "This is a milestone for Mellon," said Martin McGuinn, its chairman and chief executive officer, during the press conference Tuesday. "We will be stronger and faster growing than ever."
Mr. McGuinn insisted that the divestiture would not be a precursor to an outright sale. "Mellon is not for sale," he said. "This transaction makes us less vulnerable."
Still, some analysts said the deal could bring some risk to Mellon. The disappearance of the retail bank is expected to dampen earnings per share by 20% to 25% starting next year, said Michael Mayo, an analyst at Prudential Securities. "It puts more eggs in the basket of asset management and servicing at a time when near- to medium-term growth rates for those businesses are uncertain," Mr. Mayo said.
One retail competitor, James E. Rohr, the chairman of Pittsburgh's PNC Financial Services Group, seemed gleeful about the deal. Pennsylvania bankers remember the last time an out-of-state banking company bought a big branch operation there - the trouble-laden merger of CoreStates Financial Corp. and First Union Corp.
"Our success in Philadelphia following First Union's arrival - where we grew deposits by $1 billion and expanded customer relationships with small-businesses and middle-market companies - proved our ability to win business during times of market turmoil," Mr. Rohr said Tuesday in a prepared statement. "I know our employees are excited to welcome Mellon customers to PNC."
