Bank of New York Co.'s fee generating businesses have won plenty of fans in the marketplace, but some observers are starting to wonder what New York City's oldest bank will do to keep up with the competition in retail banking.

While competitors Chase Manhattan Corp. and Chemical Banking Corp. have merged to form an enormous retail power in the New York metropolitan market, Bank of New York has focused on developing such high-margin businesses as securities processing and global custody.

But the retail operation has lagged, analysts pointed out. Nearly 40% of the bank's 380 branches lack automated teller machines. And unlike its rivals, the bank has no major effort under way to provide electronic banking to customers.

Data from Gerard Klauer Mattison indicate return on equity from retail banking is about 12% at Bank of New York, much less than the 15% average of its money-center peers. The retail bank now contributes less than 15% of profits to the company - lagging behind the processing, credit card, and commercial lending units.

Bank of New York executives "admit that the retail bank's returns are disappointing," said George Salem, the Gerard Klauer banking analyst. "There is not a lot of talk about it, but something has to be done."

Mr. Salem said the bank should at least try to bulk up the retail operations internally. Others say the bank ought to get out of the business entirely.

"The retail bank is a low-growth part of their business that chews up a lot of capital," said David Berry, director of research at Keefe, Bruyette & Woods Inc. "They would be a faster-growing, higher-return company if there was some effective way to get rid of it."

But the most popular view is that Bank of New York needs a large acquisition to beef up the retail side. "They have been stripped of their role in the New York market, and they must get bigger," one investment banker said.

Indeed, Bank of New York is rumored to have talked recently about a merger with Summit Bancorp., Princeton, N.J., and with Fleet Financial Group, based in Boston, a few years ago.

Bank of New York is thought to have been close to a merger with Pittsburgh's Mellon Bank Corp. in January, and observers say the New York money-center bid on the U.S. commercial banking operations of National Westminster Bank PLC, which were sold to Fleet this year.

But analysts caution against expecting any major strategic move soon.

Bank of New York's overall returns are stellar, and embarking on a major merger that might dilute investor returns could infuriate shareholders who have come to expect a disciplined, cost-effective approach from the bank.

Chief executive J. Carter Bacot is legendary for his thriftiness - he is rumored to have told his head of investor relations to pay for his own copy of The Wall Street Journal when an expense bill was submitted - so the bank is seen as unlikely to pay top dollar for an acquisition.

A bank spokesman said company executives were unavailable to comment.

Investment bankers familiar with the bank say it has stuck to a three- pronged strategy that included the purchase of Irving Bank Corp. in 1989, development of specialized business lines, and eventual completion of a merger of equals.

In 1992, it acquired 63 New York branches from Barclays Bank PLC. In 1993, it bought a midsize bank in New Jersey. And last year, it acquired Putnam Trust in Connecticut.

The three-tiered strategy has impressed investors, who have bid up the bank's shares by 87% since 1994.

But now some say another piece is needed to complete the puzzle.

"They have to come up with a better retail strategy. It was one thing a few years ago to have Chemical, Chase, Manufacturers Hanover, and Citicorp in New York, but now it is just Chase and Citi," so Bank of New York's inattentiveness to retail is magnified, an investment banker said.

A lawyer familiar with the bank said, however, that it feels no need for a major deal. "This is a bank that has never equated size with profitability," the lawyer said.

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