Mellon Financial Corp. has captured five former Deutsche clients that State Street Corp. had assumed it pocketed when it bought Deutsche Bank AG's global securities services business in January.
The Pittsburgh banking company announced at its 2003 Investor Day Conference on Wednesday that it had acquired $70 billion of custody assets from the large customers.
"Particularly in traditional markets in the U.S., which is a big piece of the book, there has been a heightened degree of activity since the announcement in November of last year of this deal," said Jim Palermo, a vice chairman at Mellon. "Since the announcement, eight pieces of business did not remain with State Street. Of those eight pieces, we won five, and three went to other providers."
State Street had said in April that it expected to retain 90% of the dollar volume of the Deutsche business.
Joseph L. Hooley, an executive vice president and the head of investor services at State Street, said in an interview last month that the Boston banking company was "very comfortable" about meeting the goal of 90% revenue retention.
Analysts said it would take at least a year or two to determine how much of the business State Street ultimately retains. The key customers are the largest ones. Analysts said some of them have converted to State Street and some are still considering their options.
"This is a very cutthroat business," said Geoffrey Bobroff, an analyst in East Greenwich, R.I. "State Street, PFPC, Chase/JPMorgan, and now Mellon are all trying to make a splash in this business. They are all borrowing from the future to buy this business. It puts the parties in an awkward position. It makes it very difficult for State Street to retain these assets."
Other banking companies claimed former Deutsche customers during the first quarter. Bank of New York Co. reported last month during its earnings conference call with analysts that it had won 29 mandates to manage more than $165 billion of custody assets that were previously Deutsche's.
State Street paid more than $1 billion for what it called in January "substantial parts" of Deutsche Bank's global custody business, which had about $2.2 trillion of assets under custody at Aug. 31.
Mellon's asset servicing unit has $2.3 trillion of assets under custody. It added $108 billion of assets last year and 12 customers during the first quarter, with $27 billion of assets.
Martin McGuinn, Mellon's chairman and chief executive officer, said during the conference that the Mellon's asset management arm wants to focus on organic growth through cross-selling and acquiring new clients.
To spur that growth, Mellon has developed hedge fund and separately managed account products and opened 18 private wealth management offices in the past year. In March, it announced the signing of a definitive agreement to buy the Arden Group, a privately held Atlanta investment management firm for high-net-worth investors and institutions. The deal is expected to close in the third quarter.
Banks have all been emphasizing cost savings. To cut costs, Mellon, which has $566 billion of assets under management, has eliminated 2,500 jobs since June 30, 2001, and consolidated its fixed-income and fundamental equities units.
"We are absolutely certain we have made the right investments for long-term growth," Mr. McGuinn said, projecting 8% profit growth annually in the asset management business.
Mr. McGuinn said the company has a group that continually examines potential acquisitions, but he said Mellon's executives are confident that the asset management business is complete.
"Any acquisition would be fill-ins in specific areas, such as fixed-income out of the United States or in alternative investments," he said. "Additional distribution possibilities are a priority. But we feel we have a solid position in terms of sales and product capabilities. We don't have to overreach."
