Merrill Lynch CEO Stanley O'Neal says the firm could purchase a consumer bank as part of a strategy to make his firm's retail brokerage operation more attractive to small business clients.
Morgan Stanley analyst Chris Meyer says that O'Neal told him that for Merrill to remain competitive in the wealth-management business for the long haul, the firm may need to have more “meaningful banking capabilities” to keep pace with client demand. Owning a retail bank could help, he says.
“Business owners that have created significant wealth require cash management, small business lending and transaction capabilities from their financial-service providers,” Meyer wrote in a research note to clients. “[Merrill] believes that if they were to bolt on a bank, it would deepen the relationship with their clients — many of whom are already wealth-management clients.”
But O'Neal is reluctant to rush ahead, Meyer says. O'Neal plans to explore all options, including the possibility of buying a mortgage company in an effort to emulate Lehman Brothers' vertically integrated mortgage product. He ruled out the possibility of purchasing a trust bank, because trust banks are too expensive and they wouldn't provide the cash-management capability that a consumer bank would, Meyers says. Plus, Merrill already has a lot of the trust functionality in its private-client group.
A Merrill spokesman declined to comment. Meyer's prediction is that Merrill would be interested in buying a bank that has some retail deposits and a market cap of roughly $5 billion. Says the analyst: “Big enough to make a difference but small enough so as not to change the earnings profile of the company.”