Adviser to big money sifts banks for diamonds.

R. Russell Meyer wants to tell the nation's elite financial institution investors where to put their money.

And as the man who helped advise Kohlberg Kravis Roberts & Co. on its stakes in First Interstate Bancorp and Fleet Financial Group, his thinking has proved to carry plenty of weight.

Mr. Meyer's Metier Capital Group, which is known to remain close to KKR, declines to idenfify its high-powered clients.

But he is happy to trumpet his unconventional message: Banks can compete against their nonbank competitors like GE Capital, and if carefully chosen, represent lucrative opportunities.

"What is making this industry so exciting ]is that] for the first time there are businesses out there that are not a homogeneous collection of me-too's offering the same panel of dry products run by the same management doing the exact same things," he said.

As the banking industry enters an age of unprecedented competition, institutions will be forced to radically alter their strategies. Many companies will be left in the dust, but the upheaval will also turn up some diamonds, he predicted.

This is why in addition to investment advisory work, Metier, which is based in Los Angeles, has joined forces with Deloitte & Touche LLP to advise senior bank management on how to implement these changes.

As if its plate were not already full, Metier is also set to launch a bank fund.

There are hazards to banking, Mr. Meyer conceded, like the industry's history of mistakes, which are compounded by banks' high degree of leverage. Also, the extent to which banks are tied to regional economies makes them highly unpredictable, he said.

But Mr. Meyer predicted that the elimination of excess capacity will lead to stunning efficiency gains.

Institutional mon.ey is relatively common in the banking industry, with mutual funds often controlling sizable stakes in banks.

Large individual investors like Warren Buffet, who has bought a big chunk of Wells Fargo & Co., and Lionel I. Pincus, who has invested in Mellon Bank Corp. stock, are not as common.

But Mr. Meyer is convinced that is about to change. He points to Ronald Perelman's purchase of First Nationwide Bank earlier this year from Ford Motor Co.

Only in the past two years, Mr. Meyer said, has systematic institutional money flowed into the banking industry.

"Professional, institutional merchant banking money is a relatively recent phenomenon in American banking," he said, citing the Bass Brothers ownership of American Savings Bank.

"There used to be a conventional wisdom banks will never be able to compete with -- and you name a nonbank competitor and you drop it in, GE Capital, whatever -- but I don't think that is necessarily true," he said. "Not all banks are doing this, but I think there are banks out there that are doing a terrific job at driving their cost structure down."

History is running against Metier's ability to attract merchant banking money, however. In the past, these investors entered the industry at times of downturns.

KKR's investment in Fleet and the restructuring of Bank of New England occurred at a time when U.S. banking was in its worst shape since the Great Depression.

With the market flush with equity, whether Mr. Meyer can attract investors hungry for huge returns is an open question.

Mr. Meyer argued that the face of banking has changed because of increased competition, and that will attract merchant banking money to companies regarded as the strongest competitors.

Three years ago if a bank had a 60% efficiency ratio, it was considered lean and mean, Mr. Meyer said. Today that is considered the middle of the pack.

Cost control is an important criterion for Mr. Meyer, so it is no coincidence that two of the best-known cost cutters of 1994 -- Fleet and First Interstate -- are banks which KKR controls large stakes.

He will not disclose which banks he likes -- that's what he gets paid for, he joked. But banks such as Fleet -- Mr. Meyer helped orchestrate its purchase of Bank of New England -- which are radically cutting back, or banks with strong core or niche businesses, are likely to be high on his list.

Metier Capital Group was formed last year by the principals of the now-defunct D.M. Griffith & Co. -- Mr. Meyer, Kevin D. Casey, and Sharon R, Graves.

KKR helped establish Griffith in 1986 as its informal financial institutions advisory unit. Mr. Meyer came over the following year from First Interstate, where he worked in the mergers and acquisitions department.

Mr. Casey arrived in 1989, after stints at Kaplan Smith and Lehman Brothers. And Ms. Graves came in 1988 from Goldman, Sachs & Co. After Mr. Griffith left last year, the three pooled their talents.

Today there is no contractual relationship between KKR and Metier, but the relationship is still sound.

"The principals of Metier Capital Group have a proven approach to investing in the banking industry which we have found to be very effective at assisting us in delivering returns to our investors," said Michael Tokarz, general partner with KKR. "Their advice in analyzing investment opportunities, structuring those investments, and identifying additional sources of value has been a major factor in the success of our banking investments."

KKR's investors as of April 30 owned a 14.1% stake in Fleet, and as of June 30 a 7.9% stake in First Interstate.

Mr. Meyer said Metier has fewer than five clients, and has examined more than 100 bank.s for them.

Metier is not for investors Who run with the cyclical pack and put their money where the market is moving at any one time, Mr. Casey said. "Our investment philosophy is one which is very long term, and as a result we don't tend to look solely at cyclical trends to make investment decisions," he said.

So, day-to-day movements of stock prices and regional investing are of little concern to the group.

Investment expertise aside, it still may prove difficult for Metier to attract clients.

Some could be turned off by the Bank Holding Company Act's prevention of cross-ownership of industrial and banking concerns.

Unlike other industries where shareholders have a bigger say and can often initiate board takeovers, in the banking sector institutional investors must rely on the management in place.

That is why, in addition to looking for strong core franchises and sound niche businesses, Mr. Meyer also looks for intelligent, progressive management.

"I think some great managers are coming into the industry," Mr. Meyer said. "Either they are growing up in the industry, and they are finding themselves in a senior management position or coming from outside the industry."

Of course, as evidenced by KKR's presence in two institutions at the forefront in cost cutting in the industry, shareholders increasingly can make a difference in banking.

Similar pressures have been applied to Michigan National Corp., where large investors have called for management to step down.

Marshall Davidson, a longtime friend of Mr. Meyer and an investment banker with Adams Cohen in New York, praised Metier's three-pronged approach to banking.

"They are a hybrid of consulting, investment banking, and merchant banking," he said. "And they embody the most practical aspects of each discipline."

Based on this expertise, Metier hopes to build a solid relationship with Deloitte & Touche.

With the investor know-how of Metier and the implementation skills of Deloitte, Mr. Meyer is certain he can easily convince banks to use the service.

The partnership will focus on improving both the core institution and shareholder value, said Dave Rosenblum, a principal in Deloitte & Touche's financial services industry consulting practice.

In general, consulting is booming in banking as companies scramble to cut costs and zero in on their profitable businesses.

"Consulting is going though a change. As institutions are looking to improve profitability, they are looking for ways of outsourcing," said Robert E. Kafafian, a consultant with Hopper Soliday & Co., a unit of Dauphin Deposit Co. in Harrisburg, Pa. Hopper provides banks with valuation systems.

Similar consulting outfits are emerging, but none have the onetwo punch of Deloitte & Touche and Metier, Mr. Meyer said.

Metier also hopes to start a fund to exploit opportunities it identifies, whether clients choose to join in or not.

No launch date is set for the fund, which has been delayed by the group's activities in consulting and advisory work.

"But the reasons why we believe in the fund are the same reasons we are advising institutional investors, and the same reasons we are consulting," Mr. Meyer said. "We are extremely bullish on this industry."

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