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Royal buys Mellon unit
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July 17, 2001: 8:08 a.m. ET
UK's second-largest bank pays $2.1 billion to expand its U.S. operations
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LONDON (CNN) - Royal Bank of Scotland said on Tuesday it agreed to buy the retail banking unit of Mellon Financial for $2.1 billion to expand in the U.S.
The UK's second-largest bank, which took over rival NatWest last year, said it will merge the Pittsburgh-based Mellon (MEL: Research, Estimates) bank with its U.S. subsidiary, Citizens Financial Group.
The all-cash deal will double the number of Citizens branches to 688 and expand its geographic reach in New England as it integrates the 345 Mellon branches, mainly in Pennsylvania, the Royal Bank said.
Royal Bank said it estimates the current earnings of the Mellon banking business to be an annualised $241 million before tax and $161 million after tax. The acquisition is expected to be completed in the fourth quarter, the bank said.
"The Mellon transaction is a logical and low-risk extension of the Citizens franchise which is not only a good deal in its own right, but opens a range of additional options for us," said Royal Bank Chief Executive Fred Goodwin, who did not rule out other acquisitions in the U.S. or Europe.
The Scottish bank has been on the look out for a U.S. retail bank after failing in its bid in June to buy Dime Bancorp, which went to Seattle-based Washington Mutual (WM: Research, Estimates) for $5.2 billion.
Mellon, which owns the Dreyfus group of U.S.mutual funds, has recently concentrated more on fund management and processing securities trades rather than traditional retail banking.
Royal Bank (RBOS) also announced a share placement in London to raise £2 billion ($2.8 billion) to fund the Mellon transaction and integration of the businesses. The placing is being managed by investment banks Merrill Lynch and UBS Warburg, the bank said.
Royal Bank shares were down 1.9 percent to 1,501 in London afternoon trading after the acquisition and the issuing of new shares were announced, along with an earnings forecast.
U.S. ratings agency Moody's Investors Service, meanwhile, said Royal Bank and Citizens Bank remain on review for a possible credit rating upgrade after the Mellon agreement.
"The review for possible upgrade for Royal Bank of Scotland was prompted by the visible success of Royal Bank of Scotland Group in integrating National Westminster Bank since its acquisition," Moody's said. "The review remains unchanged following this proposed acquisition."
The Edinburgh, Scotland-based bank also forecast its half-year profits to June 30 before tax, goodwill amortisation and integration costs would be £2.75 billion, up 37 percent from £2.01 billion in the same six months a year ago, as if the NatWest takeover had contributed.
The bank finally acquired NatWest on March 6 last year, beating rival Bank of Scotland (BSCT) and overcoming NatWest's determined defence.
It said the integration of NatWest was "fully on track" and income was up 14 percent, although no numbers were given. Costs were down 1 percent, but provisions for the loan book were up 19 percent.
Royal Bank said its half-year earnings will be announced on August 7. 
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