Monday, April 10, 2006

Bank of New York Asset Swap

Though admittedly, I am somewhat disappointed in the valuation accorded the Bank of New York (BK) retail business in the asset swap with JP Morgan (JPM). Let’s look at the valuations of the assets swapped.

BK is selling its retail branches for $3.1 billion, significantly less than the $4-5 billion numbers that had been rumored. JPM will also be making a $150 million payment to BK upon closing.

BK is acquiring JPM’s corporate trust operation for $2.8 billion. This almost triples BK’s corporate trust assets from $3 trillion to $8 trillion, making it a global leader in this business.

The deal makes a great deal of sense strategically. BK becomes much more focused on security servicing and wealth management. This is a very scalable business, and hence cost savings should be forthcoming fairly quickly despite management’s relatively conservative views expressed in today’s conference call.

BK also avoids the danger of being an “also ran” in the highly competitive New York retail banking market. The sale at this point infers that potential credit risk issues in the middle market have been avoided. Growth in retail banking has proven a challenge for BK in recent years and an exit strategy is a sensible decision, especially before problems develop.

Finally, like domestic markets have already experienced, international markets are becoming less reliant on traditional banking and increasingly dependent on capital markets instruments, in particular, structured products. Quoting today’s conference call: “Since 2001, debt issuance outside the U.S. has grown at a rate in excess of 20% and the number of issues has nearly doubled during that period. By way of comparison, 80% of U.S. financings are either debt or equity. Only 20% are bank debt. Internationally, it is the reverse -- 20% debt and equity, 80% bank debt.”

The JPM transaction brings with it 15 additional overseas offices which significantly expands BK’s global presence.

I continue to believe that BK, despite some near term earnings dilution, will find a higher earnings multiple in a more rapidly growing, fee income stream versus its previous blend of businesses.

I, my family, and clients have a current position in BK.


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