Banc One Faces A Rocky Act Two

John B. McCoy, the genial chairman of Banc One Corp., is more used to talking about big acquisitions than big write-offs. So it was a chastened McCoy who on Nov. 21 announced a $235 million aftertax charge to reverse a costly investment strategy, cut expenses, and consolidate its far-flung, nearly autonomous, and unwieldy network of 77 subsidiary banks.

For years, Columbus (Ohio)-based Banc One excelled as few others did, inventing new products and shining up its many acquisitions, which it regarded as "a line of business." It cherished its focus as a premier retail and small-business bank. Under McCoy, the third in his family to run the company, Banc One grew from $8 billion in assets in 1984 to $88 billion today. It has racked up 25 successive years of earnings gains.

RATES SQUEEZE. Over the past several years, though, it amassed an enormous position in securities and derivatives. Those investments were major contributors to earnings when rates were falling, but they have hurt it badly now that rates have reversed course. Largely due to the investments, earnings from operations are expected to fall slightly from the $1.14 billion reported for 1993, and the charges will bring them down further.

McCoy now acknowledges that "the market has signaled to us, stick to your core markets, don't try to guess interest rates." But his announcement, which includes a $170 million loss on the sale of $5.7 billion in securities, cutting employment by 4,300, and closing up to 100 branches, didn't win over investors. The stock is selling at around 25, off 34% from its 1994 high of 38. McCoy says Banc One will have to prove itself "by putting numbers on the board."

Banc One's problems go back to its 1989 foray out of the Midwest, when it acquired the failed MCorp banks in Texas. The MBanks had lots of deposits but few loans; those that it had paid variable rates. That left Banc One exposed should rates fall.

To offset this risk, Banc One became a heavy user of interest-rate swaps, which allowed the bank to convert part of its variable-rate income stream to fixed rates. With rates falling, the strategy, combined with investments in fixed-rate securities, worked well. Last year, the company's investment positions contributed some $91 million to income. But this year, while the derivatives worked as expected, "the rate increases were larger and came faster" than the bank anticipated, says McCoy. Locked into the swaps, the company's gains evaporated, and it began losing money on the positions. Now, having taken the loss, McCoy says the bank will keep its interest-rate sensitivity within a narrow range--though some analysts wonder if rising rates will still hurt profits.

Effectively consolidating the Banc One empire may be even more difficult. The bank has succeeded so spectacularly because it has allowed affiliates to run their own show. Competing through a fabled management-information system that ranked each unit's performance monthly, they developed numerous new products and services.

CRUCIAL QUESTION. But in the last year or two, McCoy found flaws in the system. A bevy of local processing systems were breeding inefficiencies. Expense ratios were creeping up. Some small affiliates said they needed more heft to compete effectively. Belatedly, McCoy moved to consolidate back-office operations and reduce the number of bank charters from 77 to 13. There will now be two check-processing centers in Ohio, instead of 22. McCoy has promised next year's expenses will be level with 1994's.

But the plan raises a crucial question. "Can the banks hit the high-return numbers without [Banc One] being the independently and autonomously managed [system] it was?" asks Morgan Stanley & Co. analyst Dennis F. Shea. "The big challenge is the culture," adds one regulator. McCoy frets about it, but argues that Banc One can pull it off.

With all these questions, perhaps it's no surprise that Wall Street remains skeptical. With Banc One's strong franchise and capital, it could earn its reputation back. But if the bank frequently has defied naysayers, notes one former executive, "that was easier to do when they were driving a motorcycle than a Mack truck."

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