Is `Nice, Big, Dull' Good Enough?

NBD is bringing its conservative style to First Chicago

Early last year, not long after First Chicago Corp. and Detroit's NBD Bancorp Inc. completed their $5 billion merger, senior managers sat down at a suburban Chicago conference site to get to know one another better. Apart from being Midwestern bankers, their banks might have been from different planets. Although hurt in the 1980s and early '90s by lending and trading problems, First Chicago had long been regarded as the preeminent international bank between the coasts. First's execs viewed their Detroit sidekicks as little more than rubes running a second-tier outfit. NBD saw their new colleagues as East Coast-style gunslingers. And they had very different agendas: NBD wanted to expand beyond its region, while First wanted to avoid being taken over.

Such cultural disparities have capsized many mergers. A condition of the deal was that Verne G. Istock, NBD's chairman and CEO, would succeed First's chairman and CEO Richard L. Thomas upon his retirement last May. But it was only after months of temporizing that NBD--a bank two-thirds the size of First Chicago--really began running the show.

Challenges facing First Chicago NBD Corp., as the new bank is called, will be a lot more treacherous. Istock, a sturdily built, white-haired lifelong banker, is embarking on a strategy that might be called Fortress Midwest. He wants to expand First's already-dominant share among lucrative midsize companies in his region. Says Istock, in his typically plain-speaking fashion: "I like the Midwest. I know the Midwest. We want to dominate the Midwest."

That approach is a throwback to an era when banking laws helped banks secure pieces of geography. But those walls have been reduced to rubble.

Istock now faces sharply rising competition from a battery of other banks hawking products to the same consumers and midsize businesses that comprise some 41% of First's income.

RIGID FOCUS. The easygoing Istock says he is unfazed by these threats. He mixes a populist touch with a sense of determination and realism about the challenges ahead. He revels in client calls, and when in town often ventures for lunch from his L-shaped ninth-floor office to the employee cafeteria four floors below.

Istock is pursuing a stolid, risk-averse style with a rigid focus on a limited number of products and customer areas. Some old First Chicago wags crack that NBD stands for "Nice, Big, Dull." But to Istock, who worked his way up from NBD credit-officer trainee, "there's nothing wrong with being boring if you can produce results."

For now, he is producing. In 1996, First's profits rose 25%, to $1.4 billion, and its anemic return on equity shot up from 14.5% to 17%. The rub: behind those figures were stock buybacks, $200 million in cost cuts, and shucking $25 billion of low-yielding assets. Revenues--key for long-term viability--grew a so-so 7.7% in 1996 and 6.8% in the first quarter, including securitization. But the stock, though returning 41% in 1996--about average for the industry, has returned 2.8% this year, below the group. Analyst Thomas H. Hanley of UBS Securities Inc. likes First's strategy but warns: "If they stumble, the bank will be bought in a hostile deal." Says Istock: "In a consolidating industry, you are always vulnerable, but I don't worry about it."

What he is worrying about is boosting revenue growth. One major target: First's stellar credit-card unit, the nation's fifth-largest, with $17.5 billion in receivables. Last year, it posted a healthy 32% return on equity. But now, the unit is suffering falling margins, higher losses, and tougher competition. Executives--eager to buy card portfolios from other issuers--are confident that returns can settle in the still-healthy 20%-25% range. What's more, Istock sees new growth prospects: By effectively massaging the huge credit-card database, he wants to sell new insurance products, hoping to boost earnings from $54 million in '96 to $200 million by 2000.

BEST PROSPECTS. Another problem is First's large corporate bank, which despite repeated revampings has not overcome low margins and ruthless competition. Istock plans to shrink the unit's capital by 25% to 30% in the next two years and dump unprofitable product lines and customers. His goal: boost unit returns to 15% by 1998 from 1996's paltry 8%. First execs see the best prospects in the middle market by pushing corporate products such as trade finance downmarket and selling such First products as cash management to old NBD clients. And Istock will offer investment banking services through an alliance with Robert W. Baird & Co. of Milwaukee.

But First's Fortress Midwest strategy is still vulnerable to forays by rivals. "We have a hit list of First Chicago customers who are not getting proper attention," says Marcus W. Acheson IV, head of Bank of America's Midwest commercial-banking unit.

Any slippage could be perilous. Istock clearly would like to buy other banks. Among the prospects: St. Louis' Mercantile Bankcorp, Milwaukee's Firstar, Cleveland's National City, and Pittsburgh's PNC Bank. But the new First could become just as vulnerable as the old if it can't raise its returns. Such banks as NationsBank Corp. and BankAmerica are often mentioned as possible acquirers. Concedes former first Chairman Thomas: "NBD placed a much higher value on the shareholder over the years than First." Now the question is: Can Istock do the same thing on a larger scale--showing the city slickers a thing or two? Or will he be forced to turn the bank over to a bigger player to deliver?

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