Trillion Dollar Banks

Are megabanks--once unimaginable, now inevitable--better...for customers, the nation's economy, or even for the banks?

The $1,000,000,000,000 bank. Once, it was unimaginable. But in eight days in April, three eye-popping megamergers have brought the prospect of the first trillion-dollar bank within sight. Suddenly, it seems to be the all-but-certain climax of the cycle of ever-larger combinations that have already reshaped the industry.

As staggering as the $1 trillion sum may be, the concept is hardly far-fetched. Citigroup, to be formed from a merger of Citicorp and Travelers Group in a deal announced on Apr. 6, will have just under $700 billion in assets. To get to a trillion, Citigroup co-CEOs-to-be John S. Reed and Sanford I. Weill would only need to put together a deal half the size of the one they just assembled. The combination of NationsBank Corp. and BankAmerica Corp., announced on Apr. 13, creates a $570 billion giant that promises to become the first truly national bank in the U.S., with red-white-and-blue BankAmerica signs dotting the landscape from California to Carolina. It could reach $1 trillion in assets in just four years if it grows 10% annually.

This has bankers musing out loud about the "T" word. Says Banc One CEO John B. McCoy, who on Apr. 13 announced his own $30 billion megadeal to join with First Chicago: "It won't happen in the next couple of years, but in the next five years? Yeah."

But why should it happen at all? In the short run, it's mostly about cost cutting--about wringing efficiencies from traditional banking, now a slow-growth industry rife with overcapacity and declining margins. Think steel. In the long run, however, it's about reinventing banks--following the lead of Citicorp and Travelers to create full-service companies that can market a slew of financial services to corporations and consumers.

The latter concept--a global financial-services supermarket--has yet to be proven a winner. But investors can easily grasp the benefits of a good old-fashioned industry consolidation. Two big banks merge, combine operations, eliminate jobs and produce a tidy and predictable jump in earnings--and share price. And that new stock price provides the fuel for the next deal and the next and the next.

This almost self-perpetuating cycle will continue to drive the bank merger wave--and it all but guarantees the creation of a trillion-dollar bank. Indeed, because today's heady bank stock prices reflect growth expectations beyond what mere banking can produce, bank holding companies have little choice but to keep dealing. "Size is driven by the growth requirements shareholders put on their stock," says Peter Davis, partner at consultancy Booz, Allen & Hamilton. "The banks have a growth bogie on their stock."

And it's not going away. Look what happened in the days following the first of the first of the three big deals in April. Keefe, Bruyette & Woods Inc.'s banking index jumped 6%. In fact, megabank deals could provide megareturns: A recent McKinsey & Co. study concludes that these deals will yield efficiencies and even boost competitiveness. The new BankAmerica, for example, says it can trim its $19 billion in combined expenses by 10% and cut up to 8,000 positions nationwide. McKinsey found that merger mania often drives high-cost, high-priced players out of the market. Indeed, these days, any bank with an efficiency ratio--of costs to revenues--above 55% faces the threat of imminent takeover, according to McKinsey.

At the same time, the race to the trillion-dollar bank is part of a bigger phenomenon. The emerging megabanks will be a geographically diverse conglomeration of traditional banking, mixed with an array of other financial services from stock brokerage to insurance to mutual funds. They will invest heavily in technology that generates efficiencies and allows them to mine data about customers all over the nation--and even overseas--to offer them new products and services. "The type of approach that will come forward--what I would call the global information relationship--is one where a financial institution will have customers both local and global," says William Randle, an executive vice-president at Huntington Bancshares.

The trillion-dollar players will also introduce national brand marketing to the banking business. As megabanks spend hundreds of millions annually on ad budgets to build nationwide clientele, names like BankAmerica will be right up there with McDonalds, Nike and Coke.

Still, there is as much fear as hope behind the race to the trillion-dollar mark. Conventional banking--taking deposits and making loans--is now a commodity business with paper-thin margins. The Federal Reserve calculates that banks' share of household financial assets has fallen from 90% in 1980 to just over 55% at the end of last year, while mutual funds' have grown from around 10% to more than 44%. Commercial banks now hold only a 28% share of consumer credit, vs. 72% for nonbanks. And banks' share of business credit has fallen from nearly half in 1980 to around 35% today. Meanwhile, electronic commerce looms as a new threat.

"Something called a bank does not have a monopoly on much of anything," says William McDonough, president of the Federal Reserve Bank of New York. "The financial-services industry is moving toward a true financial services industry where the major players will offer a full line of financial products."

Hence the deal frenzy. Sure enough, competitors gaped for a moment at the size of BankAmerica, Banc One, and Citigroup deals. But they are quickly laying plans to catch up. Edward E. Crutchfield, who built First Union into the nation's sixth-largest bank as Hugh L. McColl Jr. transformed crosstown rival Nationsbank, could not sleep the night he heard rumors of the BankAmerica merger. Waking at 4:30 the next morning, he consumed news of the deal over coffee and began plotting his next acquisition. "As the shape of the industry now looks to me, we'll have to do something," Crutchfield says. "There are still two or three major acquirers out there and easily 6 to 10 sellers."

Wells Fargo, Mellon Bank, and PNC Bank are mentioned prominently as takeover targets, while Chase Manhattan, U.S. Bancorp, and First Union are seen as wannabe acquirers. Market sources say U.S. Bancorp could make a run at Wells Fargo, and the new BankAmerica ultimately could buy Banc One--provided regulations limiting banks' share of the total deposit market and changed. Wells declines comment, and Banc One officials could not be reached.

Then there's the talk that Chase would make a bid for First Union. "In a world where Citibank and BankAmerica sold out in a week, nothing is unimaginable any more," says David S. Berry, director of research at Keefe, Bruyette & Woods.

While creating a $1 trillion bank is now plausible--and plotting its strategy on paper is possible--making such a megabank succeed will be an amazing management feat. That's a tall order in the banking business. The sheer scope of such a large and unproven institution is daunting. "The day-to-day reality of pulling this together will be more difficult than currently envisioned," warns Richard Hartnack, vice-chairman of Union BanCal, California's third-largest bank.

To be successful, the megabanks first will have to stall the decline of the conventional banking business by mixing an alchemy of cutting-edge technological wizardry with old-line banking knowhow. They'll have to create nationwide brand names at the same time that they try to retain customers wary of big banks. They'll have to move people away from tellers to automated banking. And they'll have to integrate geographically and culturally diverse enterprises, all while negotiating the riptides of competitive and legislative change.

Aggressive marketing, technology, and the cross-selling of financial services will be the key to making a $1 trillion bank work. Bankers such as McColl and McCoy dismiss any concerns about running their huge enterprises. They recognize that they will have to fight off the lethargy and bureaucratic thinking that often afflict companies of such huge scale. But these bankers believe that running a $1 trillion bank will not be any more complex than piloting General Electric or General Motors, Exxon, or Coca-Cola.

Yet even among the converted in banking, there is skepticism. "Is it really valid to think that your mortgage customer is going to be any more in the mood for your credit card than they were two weeks ago?" says First Union's Crutchfield. "There has been no shortage of offers. Consumer financial services is just too damn saturated a market. The real problem is going to be, can you really cross-sell to customers?"

Also, the history of bank mergers is not all happy. In many cases, the top-line gains and "synergies" never followed the cost-cutting. And some deals have been troubled from the start. Wells Fargo & Co.'s 1996 acquisition of First Interstate Bancorp is still not completely clicking--even after at least $150 million in unexpected integration-related write-offs and the loss of at least $5 billion in deposits. Wells Fargo declines comment.

Indeed, some in the industry see the current race for size as a dangerous excess, driven simply by egos and inflated share prices. Richard M. Kovacevich, chairman of $88 billion Norwest Corp. in Minneapolis, has undertaken dozens of small acquisitions--but he's skeptical about bank megadeals. "The fact that they're big and national doesn't give them any more of a competitive edge," he says. "You get big because you're better. You don't get better because you're big."

The dealmakers, of course, beg to differ. "Bigger is indeed better," a beaming McColl boasted at the press conference announcing the BankAmerica deal. "We're not in any business we don't understand. We think we'll add to our product mix." And clearly, size can generate economies. Already, big banks are investing around $1 billion a year each on technology investments alone, from huge call centers to interactive ATMs. First Union just completed a 2 million-square-foot call center outside of Charlotte, where its phone banks handle transactions for a fraction of the cost of traditional tellers.

Still, bigness could create its own problems. For example, the BankAmerica deal combines two brokerage firms with a long history of personal and professional animosity: NationsBank's Montgomery Securities and BankAmerica's Robertson, Stevens & Co. "They are Hatfields and McCoys, betrothed by accident," says a gleeful Daniel Case, CEO of San Francisco-based Hambrecht & Quist. "We will be there to pick up all the orphaned customers."

Some corporate customers are also skeptical. "The Nation/BofA deal should benefit us. But I don't see how the combinations like Citicorp and Travelers are going to provide advantages to corporations like us," says William Stavro, treasurer of Mattel Inc. "We deal on one side with commercial banks and see investment banks as completely different. Put them together to create one-stop shopping? I don't think so."

Indeed, the Citigroup partners are attempting an unprecedented merger of unrelated enterprises--with shared power at the corner office, to boot. The plan could be a recipe for a creative renaissance--or the makings of a management debacle.

Another complication: As the megadealmakers labor to combine branch systems, back-office operations, and other functions, they must address a potential computer nightmare--the Year 2000 problem. Y2K, as it's known, was expected to cost Citicorp $600 million even before the Travelers deal. And the new BankAmerica's costs could run almost as high. Meanwhile, avoiding a Y2K meltdown will mean diverting money from squeezing technology-related savings from the merged banks.

Consumers also have reason to question the benefits of the megabank. In markets where mergers have led to significant market concentration, consumer advocates say that fees have risen for everything from automatic-teller-machine use to check-cashing to fetching copies of canceled checks. Corporate customers, meanwhile, fear that bigness will make banks less responsive.

Midsize banks also are bracing for the impact of trillion-dollar national rivals. Suddenly, their customers will be inundated with all manner of marketing pleas from new national megabanks--organizations that will also wield the latest and greatest technology to bring business to their online banks. Up to now, Columbus, Ohio-based Huntington BancShares figured it had done the smart thing--trying to bring in business by using cutting-edge technology, including the latest ATMs and kiosks that let customers videoconference with bank officials 24 hours a day. Now Randle worries that his bank won't be able to keep up with the new competition. "You're looking at organizations that will spend $100 million or so in marketing," he says. "They stand a much better chance of creating national and local brands."

In other quarters, however, the megadeals are greeted with glee. Insurers saw their shares soar, on the assumption that some would be snapped up by trillion-dollar contenders. Even if they don't sell out, insurers figure they can benefit from the megabank trend--by hooking up with the new giants to sell their products. "We're looking forward to working with them," says Ramani Ayer, chairman of Hartford Financial Services Group Inc., which now sells annuities and other insurance products through banks.

And, in some small towns, bankers are cheering. In Missouri, where NationsBank entered in 1996 following the acquisition of Boatman's Bancshares, community banks have flourished and multiplied in size. "NationsBank is the best thing ever to happen to community banking," says John Harlin, president of Century Bank of the Ozarks, a $125 million bank holding company in central Missouri.

Indeed, even as the industry has consolidated, there has been a flurry of new-bank charters in affected markets. Michaux Nash Jr. founded Dallas National Bank in January, 1997, and was surprised at the reaction he got to the news of the megamergers at the Dallas Country Club. Several times during lunch, leaders of the city's business community interrupted him to congratulate him on the day's news. "If these mergers keep coming, you'll have to widen your doors for the people to come in," he recalls one person saying. Says Nash: "Let those mergers keep coming. It's fabulous for us locally owned banks. I might have to change my hours to stay open longer."

It's the same brave talk we used to hear from the local fix-it shops, lunch counters, car dealers, and lumber yards--before the big brand names came to town. But if the megabanks fail to live up to their promises, Nash just may be right.

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