Deciding to exit a business dominated by a handful of major players, First Chicago NBD Corp. has agreed to refer all its master trust and institutional custody business to crosstown competitor Northern Trust Corp.

The "preferred provider" agreement follows a trend among bank companies that have decided to leave the business of offering back-office services because of the great technology expenditures needed to compete.

"This is an expensive product line to be retained," said James Schutz, an analyst at Chicago Corp., "and the bar is certainly being raised."

J.P. Morgan & Co. said Tuesday it was selling its institutional cash processing business, which includes wire transfers and other services, to Marine Midland Bank. Morgan had sold its master trust business a year ago to Bank of New York, citing technology expense.

First Chicago plans to terminate its business by June 30, 1997, shedding $250 billion of assets under administration. Although its trust customers won't be bound to transfer accounts to Northern Trust, First Chicago has agreed to market the latter's services.

And while the deal is not a sale, First Chicago would get undisclosed compensation if enough customers transfer to Northern Trust. "There is some compensation for us if enough customers go over there," said spokesman Thomas Kelly.

"What this really does is give us an advantaged sales position," said Sheila A. Penrose, executive vice president and head of the corporate and institutional services group at Northern Trust.

Ms. Penrose said she doesn't expect to capture all $250 billion of assets but believes joint marketing will draw customers. Northern Trust, with $575 billion of corporate and institutional trust assets under custody, has resisted buying business from other companies, although many competitors have done so.

For First Chicago, the move is part of the company's strategic review. Since the merger between First Chicago Corp. and NBD Corp. in November, the successor company has been consolidating businesses.

Divestiture of this business will let First Chicago "invest more aggressively in other areas of our corporate banking business," chairman Verne Istock said in a statement.

Only about half a dozen large institutions, such as Bank of New York Co. and Chase Manhattan Corp., have been able to stay in the business because of the large scale needed to compete. It makes sense for First Chicago to refer its business to Northern Trust, which is not an aggressive corporate lender, than to a money-center bank that could steal lending business.

Ms. Penrose said her company would focus solely on trust business, saying "we recognize and respect" First Chicago's other relationships with its corporate clients.

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