Some First Interstate Bank clients wonder if they'll have to find a new trust or custody bank once Wells Fargo Bank acquires First Interstate.
Making the change can be a difficult and vexing process, said Laura Wallace, investment officer at the $7.9 billion Nevada Public Employees Retirement System, Carson City. The Nevada fund re-hired First Interstate for a five-year custody contract only last year.
First Interstate has 943 institutional trust and custody clients with $68 billion in assets, making it the 10th largest domestic trust and custody bank. But buyer Wells Fargo exited the institutional trust and custody business in the 1980s, and, so far, hasn't indicated any interest in re-entering it.
First Interstate Bancorp, Los Angeles, is being acquired by Wells Fargo & Co., San Francisco, in an $11.6 billion deal.
Wells Fargo executives won't yet discuss their plans for First Interstate's trust and custody business.
In addition to the Nevada fund, among the trust and custody clients trying to get information from First Interstate about future services are: the $20 billion Oregon Public Employes' Retirement System; the $2 billion Retail Clerks of Northern California pension plan; Japan Airlines' $40 million 401(k) plan; Great Western Bank's $166 million pension plan; and the Food & Commercial Services Workers' Local No. 7 $500 million pension plan.
Said Leo Majich, administrator of the $1.5 billion pension fund of Operating Engineers Local No. 12 in Pasadena, Calif.: "Whether or not First Interstate continues to do custody remains to be seen."
He doesn't expect First Interstate's about-to-be new owners to make any immediate moves, but if Wells Fargo decides - as many other banks have done - to sell off the trust and custody services, the Operating Engineers will look at other banks.
Leonard Uhler, a portfolio manager at Great Western, said Wells Fargo might decide to get rid of trust and custody services through a sale if that business "doesn't make a lot of money" for the merged bank.
But Mr. Uhler noted First Interstate's operation is larger than the one Wells Fargo sold off, and, therefore, could have "a bit more efficiency."
First Interstate's master trust and custody business has been successful, although it doesn't have many big pension funds as clients. It brought in $1.4 billion in new business in the year ended June 30, 1995.
But the future is less certain. Said Michael Costa, a consultant on trust and custody and other banking lines with the Alliance for Fiduciary Consultants, Putnam Valley, N.Y.: "I'm not sure what the status of the (trust and custody) business is now" at First Interstate. Mr. Costa noted because First Interstate's trust and custody franchise is larger than what Wells Fargo sold, Wells might want to stay in the business, concentrating on small and midsized institutional trust and custody accounts. Global custody operations could be "outsourced" to other banks, he said.
Among the problems pension fund clients face if Wells Fargo decides to sell off or curtail First Intestate's trust and custody operations:
Conducting a search for a master trust or custodial bank can be expensive and time consuming. (Oregon already has one planned for fall and the Retail Clerks fund is doing one now.)
*Making a change in trust and custody services requires pension staffs undergo training and learn the computer systems of a new bank.
Staffs of the pension fund and bank would have to hold meetings and build relationships, which is also time consuming.
Transferring custody records from one bank to another can cause delays, and creates tension for pension staffers worried about potential problems.
At the same time, trust and custody has become a commodity business, with razor thin margins that make it difficult for all but the largest players to compete.
Banks that want to be major players in trust and custody today need first-rate global custody services, which require a huge cash expenditure. According to a Pensions & Investments' survey last fall, First Interstate ranked 13th among U.S. global custodians, with $3 billion in assets.
And, banks already established in the global custody business expect continued years of high expenditures because of technology costs and costs involved in setting up services in emerging markets.
Faced with low fees and high costs, many banks are selling off their trust and custody operations. Only last month, Bank of New York announced it had closed the transaction to purchase the global custody business of J.P. Morgan & Co. Inc. J.P. Morgan had been one of the largest custody banks, but bank executives said they want to put their resources elsewhere.
Wells Fargo Bank executives, meanwhile, just last year sold what was Wells Fargo Nikko Investment Advisors, the United States' largest index fund manager. That, banking industry observers note, could be a sign Wells Fargo intends to concentrate on more narrowly defined banking services.
Wells Fargo executives may have to indicate their intentions soon. The Oregon fund has other custodians besides First Interstate, and Randall Edwards, executive assistant to the state treasurer, said fund officials have been thinking about reducing the number of custodians.