Citizens’ Retail Hunt Leads to Mellon Arm

Royal Bank of Scotland has made no secret of its intention to beef up Citizens Financial Group Inc. by purchasing a retail bank in the northeastern United States.

Now, after a yearlong search, a seller tailored to the Providence, R.I., unit’s specifications has apparently surfaced.

Market talk late last week had Citizens in advanced negotiations to buy the retail banking arm of Pittsburgh’s Mellon Financial Corp.

Given recent trends at both companies, such a deal would seem to make sense all around, analysts said. For instance, it would be consistent with Mellon’s new emphasis on asset management and fee-based business lines instead of retail, though Mellon would giving up an earnings contributor.

Gerard S. Cassidy, a bank analyst at Tucker Anthony Sutro Capital, said Mellon “is turning itself into a State Street-like company by exiting less-profitable businesses and holding on to the more profitable, faster-growing, fee-based businesses. It’s a natural evolution for the company.”

Thomas F. Theurkauf, a bank analyst at Keefe, Bruyette & Woods Inc., said, “Mellon has been heading in this direction for years” — toward higher-growth sectors. Should it divest a majority of its regional banking operations, it would accelerate that strategy, he said.

Citizens, meanwhile, is more than capable of absorbing the branch network and can easily afford the $3 billion price tag that analysts have put on the Mellon operation. Citizens has assets of $31 billion and its Scottish parent has $477.6 billion.

None of the companies involved would comment on any deal speculation, which first appeared in the Boston Globe. But executives from Royal Bank and Citizens have repeatedly said they want to take the Citizens retail banking model and extend it to markets adjacent to its current one of Connecticut, Massachusetts, New Hampshire, and Rhode Island.

Royal Bank’s group chief executive, Fred Goodwin, said earlier this year that “the radar screen has been on” adjoining states for some time.

Mellon has about 350 branches, mainly in Pennsylvania with some in New Jersey and Delaware. That would line up well with Citizens and offer a second chance at a market Royal Bank passed on when it chose not to go after Jersey-based Summit Bancorp — which went for $7 billion to FleetBoston Financial Corp. — while it was busy integrating a major merger at home, that of National Westminster PLC.

U.K. newspapers quoted Mr. Goodwin as saying, “We would have bid” on Summit “if we had been further down the line.”

Now the timing appears to be right.

Several payoffs would compensate Mellon for the retail loss, analysts said.

Mellon’s “retail bank and middle-market bank are profitable, so there would be an earnings give up,” said Joseph C. Duwan of Conning & Co. However, the street would like the richer business mix, which would have a higher proportion of fee income, and a sizeable amount of capital would be freed up, Mr. Duwan said.

The retail bank would wind up in the arms of a company that, in the words of Citizens’ chairman and chief executive Lawrence K. Fish, is going in the opposite direction from Mellon.

“We have no plans to be in financial services. We’re a bank,” Mr. Fish said in an interview last year. “We’re not a global bank, or a processing bank, or an investment bank. We do retail and small- and middle-market banking.”

As many familiar with the company were quick to note, Citizens under Mr. Fish has also shown a ready and adept hand at mergers and acquisitions.

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