Trust Banks: Steady in Crunch Time

[Bank of New York] has that Russian [money laundering] lawsuit overhang.

Do you expect to see other large trust banks raise capital like State Street did?

Right now there is really no need for the other two banks to raise capital. It's interesting to note that the fee-based businesses are not as capital intense as lending businesses. And as a result they generate an enormous amount of equity capital from their basic operations. I would say that if there is a transaction that is a must-do transaction for any of these companies ... [they could] raise equity capital, but I don't foresee them raising equity capital as a defensive measure, which is what the commercial banks have been doing this year.

What will Wall Street be looking at when the trust banks report?

The number one issue for investors will be the growth of their fee revenue relative to the growth of operating expenses. It's extremely important for these banks because there is much greater pressure on the fee-based banks to spend and invest money to maintain technology and improve technology that's needed to deliver their products to their customers. That technology is very expensive. As a result, expense growth can easily get out of hand, and even if you're growing your revenue at 20%, if you're operating expenses are growing at 25% to 30%, you're actually worse off.

What's your top pick among the trust bank group?

Of the three, Bank of New York to us looks like it's the best value to the money. It's got a low price-to-earnings ratio relative to its peers. Also, you still have the benefits coming in from the merger between Mellon and Bank of New York and those benefits will accrue to them in any type of capital market conditions.