Consolidation in the corporate trust industry is expected to continue in 1997, but at slower levels than in recent years, industry experts said.
"The consolidation is nearing its end," said Thomas Kraack, director of business development with the San Francisco-based Spectrem Group. "I don't think we're done yet, but it's not going to be at the same pace."
A slowdown would be in line with activity in the industry in the last two years. In 1996, five portfolios involving $133.2 billion of bonds were transferred, half of the 10 transactions that took place involving about $508.6 billion of bonds in 1995, according to bank figures.
The merging of the industry is not the only concern on the minds of executives as 1997 gets underway. The pressure continues for trustees to streamline operations by maximizing technology costs. Also, they must cope with the reduction of "clawbacks," a procedure that enabled trust banks to retrieve payments made in error.
"The bogey-word 'economies of scale' will become increasingly prevalent," said Joseph Rosen, managing director of Enterprise Technology Corp., a New York-based financial consulting firm.
But sources said consolidation will dominate conversation at the water cooler this year, as in years past.
The continued push to merge operations is evidence of trust executives' need to "do things smarter and cheaper," said one banker, who asked not to be named.
Those in the acquisition arena this past year include: First Union Corp. buying the $10.8 billion corporate trust portfolio of Mercantile Trust Co. in Philadelphia in June; State Street Boston Corp. buying the $6.9 billion book of business from Mercantile Bank in St. Louis in August; and First Trust Banks buying the $26 billion portfolio of Comerica Bank in Detroit in September. The Bank of New York weighed in last year with two purchases: the $4.5 billion domestic corporate trust portfolio of Washington-based Riggs Bank in November, and the $85 billion portfolio of Wells Fargo Bank in San Francisco a month later.
The Competition
"My crystal-ball theory is that there is room at the top and there's room at the bottom," said Anthony Guthrie, a managing principal at Reliance Trust Co. in Atlanta. "Banks like BONY, Chase Bank, and State Street will compete on the national level on all types of transactions" while local providers will cater to specific local needs.
But George Salem, an analyst with Gerard Klauer Mattison & Co. in New York City, said the consolidation trend in the corporate trust industry favors the nation's largest banks because "the business is not that profitable when done on a small scale."
One bank at the top, the Bank of New York, has been particularly aggressive in its buildup of corporate trust portfolios. BONY announced its intention Dec. 11 to purchase Wells Fargo Bank's book of business when just three weeks earlier on Nov. 14, the New York bank had purchased Riggs' $4.5 billion corporate trust portfolio.
"There is business to be bought," said Salem, citing BONY's aggressive moves to pick up competitors' business.
After BONY upped its stake in State Street Boston Corp. to 9.9% earlier this month, industry sources speculated that this could lead to the bank's acquisition of State Street - fueling speculation that further transfers of large corporate trust portfolio could be in the works in 1997.
A BONY spokeswoman declined to comment on the bank's acquisition of State Street stock.
Reliance Trust's Guthrie said he sees these changes continuing especially when middle-sized regional banks retreat from the corporate trust arena after trying to gain clients on both the local and national levels.
But some banks, like First Union, have instead responded to the challenges facing regional banks by going on the attack and actively acquiring competitors' portfolios. And with this strategy, the Charlotte- based bank has evolved out of its regional niche into one of the industry's dominant players. The most recent example of this strategy was First Union's purchase of Meridian's $125 billion portfolio last summer.
Software Pays Off
One of the reasons the industry's largest banks are so successful is their commitment and willingness to invest in multimillion software systems needed to do business, sources said.
Steve Richter, a vice president for business development at South Trust Bank in Birmingham, Ala., said functions in the corporate trust industry - like other banking and securities-processing departments - are replacing human hands in an effort to streamline operations.
In addition to making payments of principal and interest on outstanding bond issues and safeguarding those securities, trustees also monitor compliance with bond documents and keep up with disclosure requirements.
But, to do so, banks must commit to spending the millions necessary to either buy or develop those technologies in order to reap the benefits from a lower-cost production line. Richter and others declined to provide more information on the systems' costs, saying they vary widely according to each bank's trust department.
The culmination of that effort, sources said, has squeezed many banks, especially those on the regional level, out of corporate trust.
But Pat Rafferty, a senior vice president at SunGard Shareholder Systems in New York City, said whether bank management decides to sell can also involve more than just high-technology costs. Sometimes it's just a matter of business priorities, added Rafferty, who sells two of the industry's three most commonly used programs, BondMaster and SunStar.
"When one bank decides to sell, there's another waiting to buy," he said. "So, clearly, there are those prioritizing corporate trust."
When Bank of America sold its $200 billion corporate trust portfolio to First Bank Systems in 1995, analysts speculated that it did so to avoid investing in new multimillion-dollar software. They, like officials at other large banks, instead opted to focus on other lines of business. Officials at Bank of America didn't return calls seeking comment.
Many some large banks have developed in-house "technology groups" to ease the transition of acquisitions into the existing portfolio. These groups work to integrate all the bank's portfolio systems whether it means rewriting entire programs or actually rekeying account information of the new system into the existing programming.
Local Niche
Kraack, of the Spectrem Group, also predicts that smaller corporate trust shops will thrive alongside the mega-banks this year. He said those banks may be capitalizing on voids left when middle-market banks exit the business and the mega-banks are unable to fill in all the gaps.
In particular, Kraack points to Reliance Trust in Atlanta, which had $108 million in bonds under custody in 16 deals during 1996, according to Securities Data Co.
But James McKenzie, a consulting director at Spectrem in charge of mergers and acquisitions, cautioned that smaller trust providers may find it difficult to compete head-to-head against the top banks who enter their market.
Fighting for Relevance
One source of conflict not expected to reappear this year is a congressional effort to repeal the Trust Indenture Act of 1939. Last year corporate trust executives found themselves fighting legislation to repeal the act - considered a bedrock of the industry - which requires corporate debt issuers to hire a corporate trustee when issuing bonds.
Their primary fear was that elimination of the act would diminish the relevance of the products they provide. Though not required to by the law, issuers of municipal securities have adopted the practice as well. But the repeal provision was left out of a securities reform bill eventually signed by President Clinton, and is not expected to be brought up again, according to Sarah Miller, a lobbyist for the American Bankers Association.
Corporate trust professionals were not so lucky in opposing action by the Depository Trust Co. in October when the depository ruled to scale back the "clawback" period to one day from 10 days. The PSA had originally insisted that the policy was an anachronism that had no place in modern banking. Paying agents responded that eliminating the grace period would hamper their ability to reclaim payments already made on behalf of an issuer.
In the end, both sides settled for the reduction, scheduled to go into effect April 30, pending approval by the Securities and Exchange Commission.
