Chase Manhattan Corp.'s anticipated acquisition of a securities processing business from U.S. Trust Corp., though still hearsay, typifies the dynamics of a market that is consolidating in parallel with banking services in general. The rumored deal -- which would give Chase the U.S. Trust businesses that handle recordkeeping for institutional investors, mutual funds and unit trusts -- did not surprise too many people in those industry segments since it was reported last week in The Wall Street Journal.
U.S. Trust, which has confirmed only that the units are for sale, is just the latest example of a midsize player backing out of a market that requires economies of scale to succeed. The same drive for scale has affected other transaction-oriented businesses, from data and item processing to credit cards.
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In the past decade, several leading banks in master trust and custody services have steamrolled smaller competitors. The five top players managed two-thirds of total assets last year, double their penetration 10 years earlier, according to figures provided by First Manhattan Consulting Group and Investment Age.
Chase, if it makes the U.S. Trust purchase, would reinforce its position among a wholesale banking elite that includes State Street Boston Corp., Northern Trust Corp., and Bankers Trust New York Corp., which consider these specialties a core competence.
"The big guys keep getting bigger at the expense of the middle tier," said Robert Tetenbaum, executive vice president at First Manhattan Consulting Group. "This is the continuation of a 10-year trend."
Although "it's rare when someone like this sells out," Mr. Tetenbaum said, many banks that lack the depth of a major player have deemphasized, avoided, or outsourced these wholesale operations areas. Chase has made a major commitment, making it the second-largest securities processor in the nation, Mr. Tetenbaum estimated.
Bank analysts agree.
"My belief and understanding of the securities processing business is that it is driven by large economies of scale," said Thomas Theurkauf, an analyst at Keefe, Bruyette & Woods. "The big are just getting bigger."
U.S. Trust was not losing any money from processing. It has reportedly generated about $100 million in annual revenues -- a healthy payback, but relatively small compared with Chase's or State Street's operations.
The U.S. Trust operation may be particularly attractive to a bigger banking company for just that reason. Players like Chase have the "excess capacity" to absorb the extra business almost seamlessly, Mr. Theurkauf said. That may explain the $350 million price that Chase was rumored to be offering.
Denis Laplante, an analyst at Fox, Pitt, Kelton, sees that price as reasonable for a business he has valued at between $280 million and $360 million. He sees the heightening awareness of low margins as an incentive for U.S. Trust to pull out of securities processing.
"U.S. Trust seemed pretty happy with the businesses," Mr. Laplante said. "I never got an indication they were disappointed with them."
Mr. Laplante characterized the unit investment trust department as "a good cash cow." But he added that mutual funds administration is an increasingly competitive business that even giants like Mellon Bank Corp. are backing away from.
For U.S. Trust, the sale of the processing unit will allow more room to focus on asset management and other lucrative core businesses. It will "simplify the story for them," Mr. Laplante said, paring the bank down to asset management, private banking, and corporate trust.
"People are thinking harder about capital issues," Mr. Laplante said. "They're awakening to lower margins."
