HSBC, Merrill Lynch Form Global Online Bank

International banking group HSBC Holdings (HSBA.L) and top U.S. brokerage Merrill Lynch & Co. Inc. (NYSE:MER - news) said on Tuesday they formed a stand-alone online bank and brokerage, hoping to attract wealthy individual investors worldwide.

The two financial heavyweights will together pour $1 billion over five years into the 50/50 joint venture, which will offer online banking and brokerage services for customers who have $100,000 to $500,000 to invest. The agreement excludes the Unites States, where most of Merrill's 19,000 stock brokers and 5.4 million customers reside.

Merrill's stock price shot up 9 1/2, or 10.6 percent, to close at 99 1/2 on the New York Stock Exchange, as other brokerage shares also rose amid a broad stock market rally. Shares of HSBC, one of the world largest banks with $569 billion in assets and headquarters in London, closed up 1.7 percent at 705 pence on the London Sock Exchange.

The new outfit, which does not yet have a name but will be co-branded Merrill Lynch HSBC, will combine Merrill's investment research and brokerage with HSBC's banking, mortgage and processing services in 82 countries. The joint venture is not a prelude to a full-blown merger, executives said in response to questions.

The companies are targeting a customer base of 10 million wealthy households that have access to the Internet, but declined to project how many clients they expected to sign up in the first year of operations.

"We see it as a unique combination of broking and banking and a world first," said HSBC Chairman John Bond at a London press conference.

The new entity, expected to be profitable at the end of five years, will roll out in the UK in the fourth quarter, HSBC's home base. After the launch it will quickly start offering services in Australia, Japan, Hong Kong, Germany and Canada, followed by the rest of continental Europe and other parts of the world, including Latin America.

"Rather than build out a virtual environment alone, with HSBC we'll be able to get to these markets quicker, more efficiently and effectively," said Merrill's chief executive, David Komansky, at a New York press conference. "It will be very difficult for anybody to emulate this."

Executives of both companies at the New York press conference sought to diffuse analyst suggestions that the new entity would cannibalize their existing customers. HSBC Chief Executive Keith Whitson, for one, said that 75 percent of the customers of HSBC's new online service in Britain came from competing banks.

"Our objective is to attract new clients to the venture," Whitson said at the New York press conference. HSBC currently has 23 million customers worldwide.

Merrill's overseas operations focus on a wealthier customer base, so the new venture should not cut into the firm's exhibiting private banking business, Komansky added.

Analysts on both sides of the Atlantic liked the deal.

"Both stand to benefit quite strongly," said analyst Jon Kirk at Fox, Pitt Kelton in London.

HSBC stands to gain from Merrill's top-rated investment research and brokerage expertise, while Merrill gains instant access to new markets.

"It's just another message that Merrill Lynch is going electronic globally," said analyst Michael Flanagan of Financial Service Analytics. "The deal looks good."

In a sea change for the full-service brokerage, Merrill last summer launched online trading to prevent customers from defecting to cheaper Internet-only rivals. The firm has since attracted $88 billion from customers in a new type of account that offers free online stock trading for an annual fee.

The new Merrill-HSBC service will have research, stock trading, cash management, check writing, debit cards, mortgages and financial planning tools. The companies estimated that the number of households across Europe, Asia-Pacific, Japan and Latin America who are Internet users and active investors would grow to 50 million over the next decade.

The new company's interim chief executive will be Edward Goldberg, a 39-year Merrill Lynch veteran who currently is executive vice president of operations services.

The two firms aim to appoint a chief executive from outside their ranks and will begin their search shortly. The venture will bring new jobs to the UK, with 250 to 300 new staff likely to be needed by the end of the year.

HSBC said in February it planned a global Internet service branded hsbc.com, and that it already had 400,000 customers doing business over the Internet. It also has Internet stockbroking in Australia and Canada.

Earlier this month, HSBC expanded in continental Europe via the purchase of French bank CCF (CCFP.PA) for 11 billion euros ($10.46 billion). CCF has its own Internet plans also aimed at wealthy customers.



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