Mellon Bank Corp.'s stock is underpriced compared with its peers' and should rise more than 12% over the next year, says Kirstin B. Gard, a banking analyst at Bear, Stearns & Co.

Her optimism stems from a belief that Martin G. McGuinn, who became chairman and chief executive officer in January, and his new team will further strengthen the bank's asset management, trust and custody, and personal wealth management activities.

Mellon is likely to sustain its annual earnings-per-share growth of 12% to 14%-or higher-for the next couple of years, Ms. Gard said. That compares with an industry average of 8% to 12%, and would be in line with other top- performing banks such as Northern Trust Corp. and State Street Corp., which also depend heavily on trust and asset management businesses.

But unlike Northern and State Street, Mellon still has substantial retail and corporate-lending businesses; that seems to discourage investors.

Ms. Gard expects Mellon's shares to rise to $41 over the next 12 months, from its closing price of $36.9375 on Thursday.

"Some discount seems warranted, as Mellon's new management and new strategy are still unproven," Ms. Gard said. "But the valuation discrepancy is unduly wide and could narrow as management begins to deliver on its earning goals."

Mellon must expand its asset management business globally, "taking a window of opportunity to establish itself in the important global markets of Europe and Japan," Ms. Gard said. Europe and Japan have not consolidated their respective asset management industries yet, creating opportunities for outside acquirers, such as Mellon.

James M. Schutz, banking analyst at Stephens Inc., is optimistic also about Mellon's domestic banking business. "The commercial bank should benefit from continued cost rationalization and more selectivity in corporate banking."

Mr. Schutz noted that Mellon's asset quality "is excellent and could position the bank for a possible cyclical downturn."

Also as "one of the most attractive franchises in U.S. banking, Mellon could be a tempting takeover candidate for virtually any large domestic or foreign bank," Mr. Schutz said.

Despite Ms. Gard's report, Mellon's stock dropped 1.2% in Thursday trading, compared with a 0.5% drop in the Standard & Poor's bank stock index. The Nasdaq bank index lost 0.77% and the S&P 500 was off 0.10%. The Dow Jones industrial average fell 0.54%.

Memphis-based Union Planters Corp. avoided the downward trend, rising 1.9% to $48.125-the third straight day of strong gains. The bank long has been viewed as a takeover target that would give an acquirer firm footing in the nation's Southeast. Management at Union Planters did not return a request for comment.

Bank of New York Co., which was named Thursday as one of Salomon Smith Barney's 15 "Exceptional Names," was unchanged at $39.125 on the day. Bank of New York is the only bank on the list, which is based on Salomon's confidence in the company's fundamentals and potential.

The names "are those companies that we believe will outperform the other 2,600 companies we follow globally," said John Hoffman, research director at Smith Barney.

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