When Signet Banking Corp. said in July that it would spin off its lucrative credit card business with an initial public offering, the Virginia bank was operating under the advice of a Wall Street firm.
That would hardly be surprising except that the adviser is J.P. Morgan & Co., a money-center bank and not one of the Street's traditional investment firms.
But J.P. Morgan is hardly alone among banks offering strategic advice to its peers.
In the race to generate fee income, U.S. banks are increasingly adding merger-and-acquisition units to serve other financial institutions. The practice, still relatively rare and plagued by obstacles, could become more common if cases such as Signet's continue to emerge.
"Clearly, banking companies are looking for other sources of revenues, whether it is insurance or securities," said Nicholas B. Paumgarten, managing director and co-head of the financial institutions group at J.P. Morgan and formerly a managing director at CS First Boston.
"This whole financial intermediary services business will more and more become one," he said.
Morgan is unique among banks as advisers. With roughly 15 years under its belt, it consistently ranks among the top bank M&A advisers.
Other banks have jumped into the game only in the last two years. And because Morgan does not have retail banking operations, many of its bank M&A clients do not fear it as a competitor, a core problem for most rivals.
But Mr. Paumgarten concedes that other money-center banks would probably not use his unit as an adviser.
Morgan competes for corporate clients across the United States. That could cause banks active in the market to shy away from using it as an investment bank, said Ray Groth, managing director of M&A in First Union Corp.'s fledgling capital markets group.
Mr. Groth, another former managing director at CS First Boston, said his unit won't advise other banks - at least not for the next couple of years.
"First Union is a sometime acquirer of other banks, and I do not want to be in conflict for the firm I work for," he said.
A bank that advises other banks runs the risk of revealing its strategic plans, he added.
"The problem is, you are going to share with your competitors your views and strategies for the future - like where banking is going," Mr. Groth said.
CS First Boston is not plagued by similar concerns, because its corporate parent, Credit Suisse, is not known to harbor bank acquisition plans in the United States.
Others take a more blunt view: that banks do not want to take advice from other banks, said Kim S. Fennebresque, the new director of corporate finance and M&A at UBS Securities, a unit of the Union Bank of Switzerland.
Fee margins are better in other industries, he added. So when there are so many other businesses to dive into, why focus on banks with all the conflicts? he asked.
These problems did not stop Crestar Financial Corp. from creating an investment banking arm two years ago with the go-ahead to advise other banks.
This year it has been the adviser on five announced deals valued in excess of $200 million. The unit's geographical range stretches from Pennsylvania through Virginia, prime territory for its corporate parent, which has been an aggressive acquirer.
"One of the problems is trying to go to work in this market, in which Crestar operates," said Edward J. Losty, senior vice president and director of Crestar Securities Inc. "We need to clear any potential conflicts with internal folks."
Other clients have also been scared away, he said, despite the fact that many of them are located in regions where Crestar cannot legally operate - at least not until interstate banking becomes law. Mr. Losty recalls that when he worked for Ryan, Beck & Co., a Pennsylvania client refused to use Crestar as an adviser because the client feared a hostile acquisition attempt, although Crestar cannot operate in the Keystone State.
Crestar Bank has yet to apply to the Federal Reserve for underwriting powers for its section 20 unit, which could help attract more clients.
Despite these setbacks and the annoying conflict-of-interest problems, Mr. Losty said he is having the best M&A year of his life With the bank and its 6,000 employees backing him up, he said, many of his day-to-day advisory tasks are far easier. Crestar staff members help him with regulatory, accounting, and asset-quality research.
At Hopper Soliday & Co., a small investment banking company that works primarily with Pennsylvania community banks, the M&A practice is benefiting from the name recognition that came with its 1991 acquisition by Dauphin Deposit Co.
Dennis A. Carpini, Hopper's senior vice president, said that since the merger, banks recognize Hopper Soliday as Dauphin's investment banking arm.
Hopper is now a section 20-sub, he said. On average, Hopper advises four to six M&A clients a year and is also a leading underwriter of municipal bonds in the state.
Harrisburg, Pa.-based Dauphin's acquisition of Hopper could become more common in the future as banks search for niche businesses to generate desperately needed fee income.
"I would not be surprised at all to see major banks develop [more] securities work," Mr. Losty of Crestar Securities said. By the end of the decade, he predicted, a regional bank like PNC Bank Corp. could buy a regional investment bank, like Wheat First, Butcher & Singer.
However, except for Dauphin, banks until now have grown their own advisory units. When Chemical Bank formed a unit last year, it chose Zissimos A. Frangopoulos as managing director. Mr. Frangopoulos had been director of internal corporate finance, helping to direct the bank's own acquisitions.
Though the new unit hired outside the bank to beef up its nonbank financial institutions team, the bank team is culled from inside Chemical.
"The underlying logic is we bring firsthand experience of a bank to the table, rather than a third party outsider," he said.
The unit assisted Chemical on its acquisition of Margaretten Financial Corp. earlier this year, and served as the adviser to Sacramento Savings Bank in its announced sale last May to First Interstate Bancorp.
For its part, Crestar culled its healthy correspondent banking network when forming its group. At J.P. Morgan, its effort is part of the firm's determination to be a full-service global financial institution.
"Investment banks now lend to corporate clients, and banks advise other banks," Morgan's Mr. Paumgarten said. "There is a convergence of these businesses, and the jury is still out on how all of them will do."
