Citibank will acquire $104 billion in Harris Trust & Savings Bank master trust and master custody assets, plus other large institutional, corporate and insurance custodial accounts.
For Citibank, the deal emphasizes its commitment to the technology-driven, large-scale trust business.
"We see ourselves as a larger player and an improving player," said Joseph Jasionowski, managing director-U.S. custody and employee benefit trust, Citibank N.A., New York.
Citibank will continue to look for more acquisitions. "If we find things as attractive as the Harris opportunity, we would probably do it again," he said.
For Harris, "this (the sale) gives some clarity to our objectives," said Donald G.M. Coxe, president and chief investment officer of Harris Investment Management Inc., a unit of Harris Bankcorp, which is wholly owned by the Bank of Montreal, Toronto.
A major Harris objective involves broadening its mutual fund product line to become competitive in the 401(k) market.
Executives at both banks declined to disclose the sale price, or how much of the large custodial and trustee services Harris is relinquishing. But indications were Harris is giving up at least its $104 billion in master trust and master custodian accounts from large pension funds and other tax-exempt clients.
"The price Harris Bank will get (on the deal) will be adjusted, depending on which clients stick" with Citibank, said Mr. Coxe.
"We expect a reasonable number of Harris clients to stay with us," Mr. Jasionowski added. But he acknowledged: "We fully anticipate some customers will use this (sale) as an opportunity to look elsewhere" for trust and custody services.
All of the Harris clients will be based at Citibank FSB in Chicago unless they request a transfer to New York, he added.
"What we don't know is the effect on clients who have custody with Harris and investment management" with Harris Investment Management, Mr. Coxe said. Those clients may choose not to stay with Harris Investment Management because Harris has given up the custody and trust accounts.
In all, Harris has $160 billion to $170 billion in trust and custody assets for all clients - large to small corporate, institutional and personal trust accounts, including the undisclosed portion Harris is giving up, a spokeswoman said.
As part of the deal, Harris is shedding $5 billion in securities lending investments run by Harris Investment Management. In all, Mr. Coxe estimates Harris Investment Management will lose some $6.5 billion in assets, a large part in short-term investments including sweep accounts.
"Our cash management operations will shrink dramatically," he added.
Citibank has been more aggressive in seeking new trust and custody business (Pensions & Investments, Oct. 30). In terms of new tax-exempt business, Citibank ranked fifth for the year ended June 30, with $19 billion. Harris ranked 12th, getting only $1.8 billion in new business, according to data in P&I's annual master trust directory.
Overall, Citibank ranked seventh and Harris ranked ninth among master trust and custody banks in terms of U.S. tax-exempt assets. Citibank had $101 billion in tax-exempt master trust assets from 321 clients and $165 billion in taxable assets from 526 clients as of June 30. In master custodial assets, it had $53 billion from 92 clients. In domestic master trust assets, Harris as of June 30 had almost $57 billion in tax-exempt master trust assets from 100 clients and $64 billion in taxable assets from 69 clients. In master custodial assets, it had $48 billion from 79 clients.
After the acquisition, Citibank probably still will rank seventh among domestic master trust and custody banks in tax-exempt business. Chase Manhattan Bank was No. 6 with $328 billion.
"Scale is an important factor" in the trustee/custody business, Mr. Jasionowski said. "We have made major investments in technology and people," he added, noting, "the type of systems required to support the information needs of customers is fairly significant."
"If you're small, it's very difficult for you to make that investment in your own proprietary system. The ability to stay as a small- or medium-sized player in the market is very difficult."
After three years of aggressive cost-cutting by major custody banks, Mr. Jasionowski sees "signs that the aggressiveness is abating somewhat."
"We will not underprice significantly," he said. "We think it's important to make money."
At Harris, the plan is to work on gaining a significant presence in the 401(k) market, especially in the Midwest, said Mr. Coxe. Harris Investment Management manages the 401(k) money; the bank does the marketing.
"What we need is a 401(k) strategy and that has to be done at the bank organization," he said. The bank hired Peter Capaccio last year as senior vice president to develop a marketing plan in anticipation of Harris' expanded 401(k) effort, Mr. Coxe said. Mr. Capaccio couldn't be reached for comment.
"Our objective is for the middle-market area," Mr. Coxe added. "We will be able to offer a top-notch product range."
"Since we had only a few products" before the changes, "we were hardly competitive," Mr. Coxe said.
"Now (mutual funds) will be the centerpiece of Harris Trust and Harris Investment Management."
Harris will convert its eight institutional trust commingled funds and 12 personal trust common funds into mutual funds. The conversion will involve setting up new mutual funds or merging the pooled funds with some of the six existing Harris Insight mutual funds. The moves will expand Harris's total mutual funds to 17.
Following the conversion, Harris will have about $10 billion in mutual funds. Harris' existing six mutual funds hold about $2 billion to $3 billion, while the pooled funds have about $7 billion.
Harris also is establishing agreements to offer mutual funds of other companies that Mr. Coxe wouldn't name. With the changes, Harris, long a fixed-income manager, now will have about an equal amount of assets in equities and fixed income, he added.