The $10 billion megamerger of Chemical Banking Corp. and Chase Manhattan Corp. is expected to intensify competition among top-tier institutional trust and custody banks.
The merged bank is expected to be a trust and custody powerhouse. With more than $3 trillion in global custody assets alone, it should edge past its nearest competitor, State Street Bank and Trust Co., Boston, by $134 million.
Chase, rather than Chemical, is the preferred global custody bank among prestigious pension funds.
The story is far different in investment management, however. Neither bank is a big player. Together, they have an estimated $80 billion in total assets under management, of which about $14 billion is in mutual funds.
Efforts to offer bundled 401(k) plan services should be aided by the merger. Chemical brings a solid commercial banking customer base among small and midsized businesses, the prime growth area in the 401(k) market, said Glen Casey, a consultant with Cerulli Associates, Boston. Chase gives the merged bank a more attractive family of funds to use in a bundled product, he noted.
Still, the merger bodes well for Chase's fledgling money management operation. And one investment banker predicts the merged asset management operation could be a serious acquirer of other money management firms.
But the biggest impact on institutional investors is in the trust and custody area. Experts say the Chemical-Chase merger, on top of a host of other bank mergers this year, will have a number of rippling effects for big custody banks:
Competitors will try, but largely not succeed, to grab trust and custody clients from Chase and Chemical.
New downward pressure on custodial fees is predicted, as consolidating banks benefit from spreading their custody and master trust operating costs over larger asset bases.
Technology spending will continue or increase.
Agent banks providing subcustodial services will face decreasing profits.
The custody banks increasingly will push into new emerging markets.
Non-U.S. banks will have added difficulty competing because American banks are attaining critical masses of trust assets and are able to spend more money. (Some bank analysts expect a foreign bank to acquire a large U.S. bank to gain a larger foothold in global custody.)
The merger is not expected to affect Chase's role as the major custody bank for mutual funds.
Clients expected to stay
Financial service and pension consultants also don't expect many Chase and Chemical master trust and custody clients to look elsewhere.
Chase master trust and custody pension clients - including IBM Corp., Southwestern Bell Corp., Litton Industries, New York State and Local Retirement Systems, RSI Retirement Trust, Entergy Corp. and the Teachers Insurance and Annuity Association-College Retirement Equities Fund - said they have no plans to change.
Howard Yata, a consultant with Wilshire Associates, Santa Monica, Calif., said both Chemical's and Chase's trust and custody operations appear to be first-rate. Most observers believe Chase's superior custody system must assume the dominant position at the merged bank.
Even though it will be difficult to wrest clients from Chase and Chemical, Lawrence W. Cohn, an analyst in the New York office of the brokerage firm PaineWebber Inc., said competitors will try.
Fee impact debated
As for fees, John Giudice, president of Buttonwood International Group, a financial consulting firm in New York, suspects the savings Chase and Chemical will earn by cutting redundant costs and taking advantage of economies of scale probably will put downward pressure on custodial fees.
But William Imhof, a principal with the Alliance of Fiduciary Consultants, Parsippany, N.J., a financial services consulting firm, said: "I am inclined to think that with fewer players, you might see more rational pricing. We may well see the end of the (custody) price wars."
Mr. Imhof said bank custody fees have fallen from comfortable levels of 20 to 24 basis points to five or six basis points for large clients. Mr. Cohn countered custody fees "can get down to zero."
The newly merged bank also may expect to retain existing clients and draw new ones in part because of its prestige as the biggest U.S. bank.
Chase has been by far the favorite among pension funds for global custody services. Clients include AT&T Co., General Motors Corp. and Boeing Co., all giant corporate pension funds.
Chase pioneered global custody in 1974. It offers many services wanted by clients, Mr. Giudice noted. Unlike many large banks, which depend primarily on agent banks for subcustodial services, Chase has its own branches in 20 countries.
Chase subsidiary to benefit
In money management, the merger may be a boon to Chase's new subsidiary, Chase Asset Management.
Earlier this year, Chase separated institutional asset management from private banking, applied for registered investment adviser status and hired institutional marketers to generate new business.
Chase began gearing up last year, when its non-compete agreement with UBS Asset Management expired. Chase had sold its old money management subsidiary, Chase Investors Management Corp., to Union Bank of Switzerland in 1991; the unit, with more than $30 billion in tax-exempt assets under management, became UBS Asset.
Chemical, meanwhile, had a number of false starts in institutional investment management. At one point, it created a holding company structure, Chemical Investment Group, most of which eventually was sold to LaSalle National Trust in 1991. Today, its money management efforts are centered on two subsidiaries - The Portfolio Group, New York, and Texas Commerce Investment Management Co., Houston - that subadvise Chemical's Hanover Funds as well.
Mark Richardson, chief investment officer of Chase Asset Management, said the combination with Chemical will accelerate his unit's plans and will add to its products.
Chemical is growth-oriented, while Chase Asset is a value-oriented manager, Mr. Richardson said. "There may be something quite complementary there," he said.
Indeed, the proprietary mutual fund families of both banks could benefit soonest from the merger. The union of Chase's Vista family with Chemical's Hanover Funds will help in the 401(k) area, observers said.
According to Pensions & Investments' directory of money managers, Chase Asset Management had $60 billion in total assets, including the Vista funds as of Jan. 1; of the total, $12.7 billion was tax-exempt assets. Chemical's The Portfolio Group had $9.7 billion ($844 million tax-exempt), including the Hanover funds, according to the P&I directory. Texas Commerce had $9.15 billion in total assets, with no breakdown of tax-exempt assets, according to the 1995 Money Market Directory.
Jeff Lovell, principal at investment banker Putnam, Lovell & Thornton, New York, said the merged investment management units of Chase and Chemical will have a strong capital position and the parent's attractive stock to do a stock-based acquisition of other money management firms. An acquisition seems necessary for money management to become a significant line of business for the merged bank, he noted.
The merger hasn't affected two related deals. Chase's joint venture in short-term investment management with M.D. Sass Investors Services, New York, closed Aug. 30. At press time, Chase's purchase of U.S. Trust Corp.'s custody, unit trust and mutual fund services unit was expected to close Sept. 1.