Bull Market, Mergers Boosted Banks' Trust Assets 22% in '98

Trust continues to be a robust business at U.S. banks, spurred by an enduring bull market and consolidation among some of the players.

An annual American Banker survey found that the 50 biggest banks in the field ratcheted up the amount of trust assets they manage by 21.6%, to $4.4 trillion last year, keeping close pace with the 22% gain of 1997. (See tables beginning on page 10.)

That was an improvement over 1996, when trust assets grew by 10.2%, a number more in keeping with the comparatively short strides made in the early 1990s.

Gross trust income was up 17.9% last year, to $20.2 billion, at the top 50 bank trustees. In the prior three years, gross trust income in the top- ranked group grew 16%, 11.6%, and 10.6%, respectively.

A concentration of business among fewer big players probably helped spur gains in 1998 and 1997, said Ronald L. O'Kelley, chief financial officer at State Street Corp. in Boston.

The trust business, once fragmented, is now concentrated among fewer banks because of mergers and acquisitions, Mr. O'Kelley said.

The survey covers a range of asset classes, such as equity and fixed income, and a range of accounts. Accounts range from personal trust to retirement plans. Services under the broad banner of "trust" can include taking care of Grandma's investments and providing custody for a mutual fund family.

Market performance is a significant factor in any overall asset and income growth or decline, and last year's continuing bull market was certainly a boon for bank trust departments. In the equity market, the Dow Jones industrial average was up 16.1%, and the Standard & Poor's 500 index 26.7%. The Lehman Brothers aggregate bond index rose 8.69% last year.

Trusts also often include relatively illiquid assets that are not publicly traded, such as stakes in privately held businesses.

Trustees with upticks that exceed the market's performance can thank growing demand for personal trusts "created by this huge explosion of new wealth," said Donald J. Herrema, president and chief executive office of Bessemer Trust Co.

Managed trust assets at Bessemer, based in New York, grew 51.6%, to $20.6 billion at yearend. The company has kept its core equity performance ahead of the S&P 500 for five years and recently began adding alternative equity products, Mr. Herrema said.

Many factors fueling growth are "clearly driven by the strong equity markets," he added. "If you were an asset manager that went backward, you've got real problems."

Equity management is a growing part of the trust business, others agreed. Besides the bull market and strong sales, another factor that helped trustees was the snowball effect of bank acquisitions of investment managers and brokerages on top of consolidation in banking.

Convergence in the financial services industry overall has raised the general profile of banks and fueled trust sales to a broader population, said James D. Little, executive vice president responsible for investment services at Summit Bancorp of Princeton, N.J.

"The perceptions of banks as (being) only trust and only fixed-income managers have changed," Mr. Little said.

Summit also added trust assets last year because of the inevitable, "estate maturities," he said.

At State Street, mutual fund servicing businesses such as fund accounting help feed sales in its enormous mutual fund custody line, Mr. O'Kelley said. The continued popularity of index funds, also known as passive investments, in retirement plans, also helps State Street stay in the top ranks of trusteeship.

"We like to say 'passive is massive,'" Mr. O'Kelley said.

Retirement plans also played a role in the growth of trust for another top ranked trustee, J.P. Morgan & Co., according to Jeff M. Garrity, managing director of institutional clients.

Morgan tapped into 401(k) administration when it took a 45% stake in the mutual fund company American Century in January 1998. Previously, the New York trustee focused on pension management.

By adding products and service, Morgan is "making sure we maintain relevance to our clients" and the marketplace, Mr. Garrity said.

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