An on-going huge shift in the trust and custody of assets could accelerate because of recent bank consolidations, bank officials say.
U.S. tax-exempt investors switched the trust and custody of $328 billion in assets during the 12-month period ended June 30, moving 90% of that to large banks recently, Pensions & Investments' annual trust and custody survey found.
One of the banks that benefited from the switch, First Interstate Bancorp, is now the target of a hostile takeover by Wells Fargo Bank, not a big player in trust and custody. First Interstate gained $9 billion of new trust and custody business during the 12 months.
If the takeover is successful, it could increase the shifting of trust and custody assets because it and other bank consolidation plans will heighten investor concerns about the long-range viability of smaller trust and custody banks.
The Wells Fargo takeover attempt also could lead other bank executives to consider mergers and acquisitions as they examine their position in the banking marketplace.
In the last two P&I survey reporting periods, U.S. tax-exempt investors changed trust and custody suppliers for a total $800 billion in assets, an amount equivalent to about 20% of all U.S. tax-exempt assets.
"It doesn't surprise me that they (large money center banks) are picking up business, but I didn't realize it was so high," said Stephen Nesbitt, a senior vice president and head of the pension consulting division at Wilshire Associates, Santa Monica, Calif.
Some bank executives said they are receiving an increased amount of requests for proposals and requests for information from tax-exempt investors considering trust and custody changes. The officials attributed many of those searches to bank consolidations and nervousness about the potential for future consolidations.
In this year's survey, State Bank & Trust Co., Boston, reported the largest book of new tax-exempt business at $84.5 billion.
The 28 banks reporting in the survey said their total trust and custody assets has increased to $3.8 trillion, more than a 13% increase from the previous year.
Other banks reporting large increases in tax-exempt assets were: Bank of New York, New York, $71.4 billion; Bankers Trust Co., New York, $55.5 billion; Mellon Trust Corp., Pittsburgh, $52.3 billion; Citibank, New York, $19 billion; and Northern Trust Co., Chicago, $10.6 billion.
Recent proposed and actual bank consolidations include: Chemical Bank's proposed merger with Chase Manhattan Bank Inc.; Mellon Bank Corp. acquired the corporate trust business of CoreStates Financial Corp.; Fleet Financial Corp. acquired Shawmut National Corp.; U.S. Bancorp acquired West One Bancorp; and NBD Bancorp is merging with First Chicago Corp.
And Bank of New York acquired Bank of America's global custody, master trust and securities lending operations; signed an agreement to acquire J.P. Morgan Inc.'s global custody operations; acquired the corporate trust business of New Jersey National Bank; acquired Putnam Trust Co.; and acquired the corporate trust business of NationsBank Corp.
BankAmerica and NationsBank also held talks recently about a possible merger.
The mergers and consolidations, bank officials believe, is stimulating trust and custody searches. "The number of searches we have seen (in 1995) will top last year, I think, and last year was a record," said Paul Marengi, director of marketing at Mellon Trust.
Since January, Mellon has booked $90 billion in trust and custody business and has almost 60 new clients, said Mr. Marengi.
The consolidation trend "has to be a driver (for new trust and custody searches) for everybody in the business right now," said Jim Darr, an executive vice president with State Street Bank & Trust Co.
Mr. Darr said requests for information and proposals from investors considering a switch in trust or custody of assets is running this year about 30% to 40% ahead of 1994 at his bank.
Even though not all requests will lead to selection of new master trust and custody banks, pension funds and other tax-exempt investors have been making significant changes in the last two years, said Mr. Darr.
"This year is one of the best years we have had in the last five, and it looks good for '96," said Sam Borowski, director of product management for master trust and custody for North America at Citibank, about new trust and custody business for Citibank.
One reason for that increase is that pension funds and other investors are forced - even though they hadn't planned to do so - to look at their trust and custody arrangements when their bank is part of a consolidation or merger, said Mr. Darr.
Some of the new business coming into large banks includes:
Ameritech Corp., the Colorado Fire & Police Pension Association and the Pennsylvania Municipal Retirement System, all hired State Street for master trust or custody; Middlesex County (Mass.) Retirement System, Philips Electronics North America Corp., National Elevator Industry Benefit Plans and the Los Angeles County Employees' Retirement Association all hired Mellon.
Also, the Texas Permanent School Fund, the Government Development Bank of Puerto Rico and the Holocaust Museum all selected Citibank, while the Chicago Policemen's Annuity & Benefit Fund and the Southfield (Mich.) Fire & Police Retirement System selected Northern Trust.
And, the Teacher Retirement System of Texas, the Anchorage Police and Fire Retirement Board, PacificCorp, and the Hampton (Va.) Employees' Retirement System hired Bank of New York, while the Missouri State Employees' Retirement System and Mercy Health Services hired Bankers Trust.
Another factor driving some of the new trust and custody searches is the potential for consolidations or change in business lines. Investors realize many regional banks that aren't part of a merger or consolidation now might be in the future, or they might announce later they are getting out of trust and custody.
"There is an incredible amount of merger and consolidation going on in the (banking) business and many (trust and custody) clients are a bit anxious about the change, and how they are going to be affected," said John Hunt, a senior vice president with Northern Trust, explaining why large trust and custody banks have become so popular.
As a result of the anxiety about consolidation, "there is a lot more (trust and custody) business up for competitive bid than there has been in the past," said Mr. Hunt. He "absolutely" sees the merger and consolidation activity of banks - and the anxiety of clients - continuing in the months ahead.
Many large and midsized corporate funds seeking trust and custody services are seeing the core credit banks consolidate, and there is a "flight to quality and commitment" for trust and custody services, said Joseph Velli, an executive vice president at Bank of New York.
Another factor in the movement of business to large trust and custody banks is that public funds are investing more globally and need top-drawer global custody services, said Mr. Velli. Fed by continuing bank consolidation, the movement to large trust banks will probably continue over the next three to five years, he said.
Tax-exempt investors are worried about some of the smaller trust and custody banks' ability to measure risk, according to big bank executives. Investors are getting more sophisticated and Wall Street is coming up with new, complicated investment vehicles. Investors want to be sure their trust banks and custodians can price the instruments accurately, and look at more than one pricing feed, said Mr. Marengi. Investors aren't sure, he said, that all banks can accommodate rapid change.