Based on a sum-of-the-parts analysis, Citi Research analysts Josh Levin and Arjun Sharma found that The Bank of New York Mellon Corporation (BK - Get Report) could unlock 15%-30% shareholder value if it spins off its investment management business. The New York-based bank’s investment management business has $1.386 trillion of assets under management. Of that, The Bank of New York Mellon Corporation (BK - Get Report) has allocated 39% to fixed income, 35% to equities, 17% to money market funds and another 9% to alternative assets.
Citi Research analysts highlight several things that favor a spin off. First, investors prefer “pure play” stocks. The Bank of New York Mellon Corporation (BK - Get Report)’s investment management business and the traditional trust bank business are two separate operations. Josh Levin said in a research note that spinning off its asset management business will boost The Bank of New York Mellon Corporation (BK - Get Report)’s value, as it will be a pure play on a traditional trust bank.
Second, investment management businesses are usually less prone to regulatory scrutiny. The Bank of New York Mellon Corporation (BK - Get Report) can lower the regulatory burden on its asset management business by spinning it off, while regulatory oversight at its traditional business will remain unchanged. That will help the bank’s investment management business improve its capital return. Spinning the asset management business will also help both of its businesses focus on their core competencies. The analysts said that the Bank of New York Mellon Corp. (BK - Get Report) can boost shareholder value by just announcing that it is considering a spin-off. However, the bank has never officially expressed the possibility of a spin.
Bank of New York Mellon’s IM business
Its investment management business is the eighth largest asset manager in the world with $1.386 trillion in AUM. On a stand-alone basis, it will be the world’s second largest pure play, publicly-traded asset manager after BlackRock, Inc. (BLK - Get Report). Pre-tax margin of The Bank of New York Mellon Corporation (BK - Get Report)’s investment management business is about 30%, in line with the asset management industry.
Citi Research analysts calculated the valuation of The Bank of New York Mellon Corporation (BK - Get Report)’s asset management unit on a stand-alone basis using two methods: P/E approach, and market cap to AUM basis. They assumed a tax rate of about 26% and pre-tax margin of 30%. That’s in line with the current figures. For their low case, base case and high case, respectively, the analysts multiplied their net profit estimate by 12.5x, 13.5x and 14.5x.
Average of the two methods figures above show that the market value of The Bank of New York Mellon Corporation (BK - Get Report)’s asset management business will be $18.67 billion in the base case and $23.03 billion in high case.
Bank of New York Mellon’s traditional trust bank business
To calculate the market value of the bank’s traditional trust bank business or investment services unit, Josh Levin used a P/E approach. He took the net profit estimate by deducting their 2015 estimate for investment management from The Bank of New York Mellon Corporation (BK - Get Report)’s consolidated 2015 net income estimate.
Then the analysts multiplied it by 10.5x, 11.5x and 12.5x to reach a low case, base case and high case value.
Now, some of the parts analysis shows an upside of 15% in the base case and 32% in high case scenarios.
-By Vikas Shukla
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