With competition for commercial loans continuing to increase, bankers would be wise to diversify their businesses to be less dependent on lending, Mellon Bank Corp. chairman Frank V. Cahouet said.
Speaking this week at a Bank Administration Institute conference, Mr. Cahouet also said his company will continue to expand its commercial and consumer fee businesses through acquisitions.
The executive, who has overseen Pittsburgh-based Mellon's transformation from a conventional lender to a specialist in commercial trust and personal asset management, predicted that most companies in need of financing will look outside the banking industry.
"Our view is, in the next decade, investment-grade businesses worldwide will not be borrowing from their banks," Mr. Cahouet said.
He singled out Merrill Lynch & Co. as a nonbanking company that is competing for business loans with $42.6 billion-asset Mellon.
"They're competing for middle market and large corporate business," Mr. Cahouet said. "That's fine. It's a free market, but that would not have happened 20 years ago."
Mellon saw the need to diversify several years ago, Mr. Cahouet said. That led it to buy asset management companies such as the Boston Co. in 1993 and Dreyfus Corp. a year later. Last year it bought U.S. Leasing and First United Leasing.
Mr. Cahouet said the key to surviving as a banking company today is to provide a range of services, rather than focusing on a single business, and being less dependent on economic and business cycles.
"We describe our company as a broad-based financial services company with a bank at its core," Mr. Cahouet said.
Mellon chief financial officer Steven G. Elliott, who also spoke at the institute's Finance and Accounting Management Conference, noted that many of Mellon's acquisitions have been purchases rather than poolings of interest.
With the exception of Dreyfus, all Mellon's acquisitions have been purchases, mostly cash transactions. Mr. Elliott said in an interview that Mellon's strategy of buying pieces of other companies' businesses has suited the bank's needs.
Mr. Elliott declined to comment specifically on future acquisitions, but said his company's plan to buy 1st Business Bank in Los Angeles makes sense because Mellon already has a presence in California. Mellon announced that deal in April.
Mr. Cahouet noted that when Mellon first decided to diversify, it depended on commercial business for about 80% of its profits. Today, less than half of its profits come from commercial operations. Consumer businesses have grown steadily.
Asked by an audience member whether he believed foreign banks would become active acquirers of U.S.-based asset management and trust companies, Mr. Cahouet said they would be wise to. But he added that foreign banks don't have good track records: "Essentially, foreign banks have not been successful in the United States."