Bank of New York Mellon CorporationBK

BNY Mellon is one of the largest custodians of financial assets in the world. Its immense size helps it obtain economies of scale in a highly competitive environment.

The merger made excellent strategic sense, as it filled holes in each firm's offerings and provides ample opportunities for cross-selling. As an example, Mellon brought its more extensive asset-management operations to the table while Bank of New York was a leader in corporate trust services.

The bank's balance sheet growth is largely driven by deposits placed by custody clients. This provides a cheaper and more stable source of funding than tapping the capital markets.

The move by Bank of New York to exchange its retail banking operations for J.P. Morgan's corporate trust business eliminated a noncore division in exchange for building scale in the firm's bread-and-butter trust operations. Read more 

Expected revenue synergies from mergers and acquisitions often fail to materialize. Thus, the firm may be overly optimistic in its hopes for future cross-selling opportunities.

The majority of BNY Mellon's revenue is tied to market valuations of its custody and managed assets. As a result, a bear market could have a significantly adverse impact on the firm's revenue and earnings.

Despite expected economies of scale, margin expansion has been conspicuously absent as BNY Mellon has grown. Recent operating margins have been pushed downward as a result of merger costs, and it remains to be seen the extent to which the firm can push cost cuts going forward.

Client retention has been excellent so far following the merger. But client dissatisfaction can take time to build, and BNY Mellon could face an exodus if it loses its focus on customer satisfaction. Read more