When Chase and Chemical announced their $10 billion merger pact in 1995, they stunned the banking world. In one fell swoop the two New York money-centers created a megabank with leadership positions in key businesses in the United States and abroad.

Three years later, the in-market merger that created Chase Manhattan Corp. seems almost quaint when compared with the cross-industry Citicorp- Travelers marriage and the cross-country NationsBank-BankAmerica deal. Even Chase chairman and chief executive Walter V. Shipley-a megamerger pioneer- says he could not have predicted the structural upheaval that has rocked the financial services world.

Now analysts, investors, and his own employees are looking to Mr. Shipley to make his next move.But with two groundbreaking deals of the decade behind it, Chase, its executives say, has the luxury of time.

As the creators of the new Citigroup and NationsBank struggle to integrate their disparate pieces, Chase will be pruning to perfection its 14 core businesses. By reallocating its massive capital base, Chase plans to ensure that each business increases its revenues by at least 13% each year.

"We will do nothing but get better at what we do," Mr. Shipley said.

To be sure, he has not ruled out doing deals. In fact, he hints that he is more open to buying something than observers have generally believed. Though Mr. Shipley boasts that "Chase has emerged as one of the few prominent globally competent banking companies," he quickly adds: "It isn't done."

What is missing, most obviously, is a substantial equity underwriting business. While Bankers Trust Co., NationsBank Corp., and others have snapped up investment banks like Alex. Brown & Sons and Montgomery Securities, Chase has done little with the equities underwriting powers it has had since 1993.

To fill that gap, Mr. Shipley said, Chase "will do a combination of buying and building." He is intent on having a viable equities business in place within three to five years, he said.

And Mr. Shipley is also open to another big banking deal.

"It's not been our goal to pay a premium for branch networks," Mr. Shipley said. "Does that mean that we would never do an in-market kind of deal? It does not mean that we would never do it."

As Chase, one of the most storied companies in banking, maps out its future, Mr. Shipley and his team are grappling with many of the biggest issues facing the industry. Do banks want to be all things to all people, or limit their strengths to select businesses? And if they choose to add to their product lines, do they build new capabilities or buy them?

Also up for debate: how to best reach customers. Do banks invest in traditional brick-and-mortar, or do they rely on technology and serve consumers who will never enter a branch? Do they want to focus their ambitions on their local markets, or do they want to be national or even global in scope?

In this story and two to follow, American Banker delves into Chase's strategic thinking-its assessment of its market position and its ideas for the future. The stories, based on interviews with an array of Chase's top executives, make clear that even a company that has amassed tremendous scale has tough decisions to make in a world where banks, brokerages, and insurance firms are increasingly entering each other's business.

"The old definitions are crazy," said Thomas G. Labrecque, Chase's president and chief operating officer. "They fit for 1933. They do not fit today. Convergence is here."

Clearly Chase, which competes in everything from local branch banking to sophisticated investment banking, is a true believer in the convergence of financial services. The $367 billion-asset company's core businesses read like a laundry list of key financial services sectors.

For example, it is No. 1 in syndicated lending and global custody. It also ranks first in its hometown New York region in middle-market lending. And mutual funds, private banking, and securities processing are also major businesses for Chase.

But the company is taking a decidedly different approach than many of its competitors to building a financial "supermarket."

Mr. Shipley said he sees high integration and management risks in cross- industry mergers on the scale of Citicorp's $70 billion marriage to Travelers. The cultural hurdles to making that deal work are huge, he said, as Travelers, and to a lesser extent, Citicorp, compete in individual businesses through separate and distinct operating units.

"If it's still 'I work for X and you work for Y,' that creates artificial barriers to trust," Mr. Shipley explained. And when it comes to mergers, "trust is essential."

"The most successful banking companies are ones that have integrated in a seamless way," he added. Whether Travelers and Citicorp can do that "is a big if."

At the same time, Mr. Shipley is skeptical about the smaller acquisitions other commercial banks have made to fulfill their investment banking ambitions.

"Acquiring a second-tier competitor in the underwriting business fixes you as a second-tier competitor," Mr. Shipley said. "It's almost easier to build it and make some strategic niche acquisitions and perform and create an image as a first-tier competitor."

Another point of differentiation for Chase is the issue of branches. As big banks pair off in an attempt to blanket the nation in branches, Chase, outside its hometown New York market, has been turning away from brick-and- mortar. Instead, it is betting heavily on electronic banking.

"What you want is customers," Mr. Labrecque said. "How you acquire your customers-there are many ways to do that."

Chase's network of 625 branches would be dwarfed by the 4,800 coming together in the NationsBank-BankAmerica deal, or the 2,800 that would be joined through the Wells Fargo-Norwest merger. But Chase officials say technology offers more efficiency and the ability to reach consumers in far-flung locations where having a branch would not be practical.

Not everyone agrees.

"No one has demonstrated the ability to get a substantial customer base without a substantial branch network," said Lawrence Cohn, an analyst with Ryan, Beck & Co. "Chase runs the risk of finding itself really hemmed in" to the slow-growth Northeast region.

In the meantime, analysts say, Chase is performing at least as well as its peers. For the first half it logged a 17.0% return on equity, compared with an average 17.64% for the nation's 15 largest banks, according to American Banker data. Excluding a $510 million restructuring charge in the first quarter, Chase's ROE was 20.3% for the half.

But its stock has not been valued as highly as its competitors', largely due to concerns about its ability to integrate its mergers and generate revenue. Chase's stock was trading at a price-to-earnings ratio of 15.53% on June 30, while the top 15 banks traded at an average of 17.06%.

"Chase is transforming itself, and they are articulating better what they are," David Berry, director of research at Keefe, Bruyette & Woods. "But it will all come down to a question of performance. They're not there yet. They have a way to go."

Chase executives, for their part, voice little doubt they will finish the job. They emphasize that Chase-the product of the 1991 merger of Chemical Banking Corp. and Manufacturers Hanover Corp. and the Chemical- Chase deal four years later-is much more than the sum of its parts.

"It's like you could have a basketball player who's 6-5 and he's a pretty good basketball player and then he gets to be 6-10 and he's a completely different player," said Marc J. Shapiro, vice chairman for finance and risk management. The new Chase "is a fundamentally different company."

Observers agree that Chase has assembled an impressive array of leadership positions in important businesses.

"They are in a very powerful position in their market and in many product lines," said Charles Wendel, president of Financial Institutions Consulting in New York. "If they can continue to exploit that position, they will be successful."

"The question for most of these banks is whether you can continue to generate revenue growth with what you already have," Mr. Wendel added.

For Chase, increasing revenues through mergers is a particularly hot topic. Deals have become such a part of the bank's daily dialogue that employees stop Mr. Shipley in the cafeteria to ask about his next transaction.

"Everyone around here feels that even though mergers are traumatic, they have tremendous value and are a ultimately a very positive experience," Mr. Shipley said. "'Let's do another one' is the attitude."

But as its competitors get big from mergers, Chase officials say they feel no pressure to make a defensive move. "It doesn't change the quality of our products and services that NationsBank and BofA are combined," Mr. Shipley said. "What that does is remove a competitor."

Added Mr. Labrecque: "If we did nothing for the next two years this is a competitive world class company. The idea that we have to do something is not right."

And what about Citigroup?

"Our businesses almost mirror each other in some ways," Mr. Labrecque said. He points out that though both organizations want to build their wholesale businesses at home and abroad, Chase wants to keep its consumer business largely within the United States.

"We are different," he said. "But that's healthy. What's not healthy is that everyone's judging us by the same rules."

Next: Chase's strategy in corporate finance.

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