Corporate Customers Seen Fleeing New Chase

When Chase Manhattan Corp. and Chemical Banking Corp. announced plans to merge, Chemical chairman Walter Shipley predicted the combined bank would "achieve double-digit earnings-per-share growth, an efficiency ratio in the low 50s, and a return on equity of 18% or better."

But some analysts say the $297 billion-asset powerhouse might be in for an unwelcome surprise.

Once the projected $1.5 billion in cost savings ran out, analysts predict, the bank would be faced with the same old problem: how to boost revenues. In the meantime, revenues might well fall as customers, wary of relying too much on a single bank, depart.

The Chase-Chemical merger is the largest of a series of mergers announced over the last several months as banks have scrambled to cope with shrinking lending margins and increased competition.

Although executives at both banks were unavailable to discuss the analysts' concerns, Mr. Shipley has said the combined institution would have more than enough capital to maintain large exposures to individual customers.

"He made it very clear that the combination would not require companies to reduce exposure," said Lawrence Cohn, a banking analyst with PaineWebber Inc.

That, he points out, is very different from what happened when BankAmerica Corp. acquired Security Pacific Corp. and began deliberately reducing its exposure.

The problem, Mr. Cohn and others say, is not that the combined bank would desert its customer base, but that clients would leave.

"Customers are buying a pig in a poke," Mr. Cohn said.

Working in the deal's favor would be Chemical's successful merger with Manufacturers Hanover Corp. But analysts say combining two different computer systems and two management teams would be bound to cause delays, a certain amount of confusion, and staff defections. All this, they add, could prompt customers to bank elsewhere, triggering a revenue downturn and higher risk.

"It will be a real challenge for them to keep the people they consider essential and develop a combined management information system," said Rapahel Soifer, a bank analyst with Brown Brothers Harriman & Co. "In the meantime, the bank will be managing itself and its risks on a suboptimal level."

In one of the first departures since the merger was announced, Alexis Rodzianko, managing director for emerging markets, quit last week to become chief executive of a new bank in Moscow. (See article on page 6.)

Analysts said that one of the most critical areas would be data processing, including cash management, corporate trust, and securities custody. Once the bank picked a system and cleared up snags, some customers would have to switch their own systems for compatibilty. And some might be unwilling.

"Both banks are sizable in all those businesses, and these businesses are typically in technological ferment," Mr. Cohn points out. "The customers don't know where they're going to stand, in terms of which system they're going to be provided with."

Beyond these immediate problems, analysts said, the combined bank will face long-term questions as well.

"The concerns are valid, even if between now and 1999 they're still outweighed by the cost savings," said Mr. Soifer. "But after the savings have been realized, they come back to the same revenue issues they're confronting right now."

"This merger may say a great deal about costs and efficiency, but what it does to solve the revenue issue is debatable," he added.

Mr. Shipley acknowledged in an interview after the merger was announced that improving revenues will be a challenge. But he argued that banks cannot grow faster than the overall economy and that Chemical and Chase had no alternative.

"I believe this will create such a powerful set of franchises, in almost every activity, that we ought to have the greatest opportunity for revenue growth," Mr. Shipley said.

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