Newly armed with the power to underwrite corporate debt securities, the wholesale banking troops of Chemical Banking Corp. are feeling flush with success.

Since the company's merger with Manufacturers Hanover Corp. in late 1991, Chemical has become a wholesale giant -- firming its position as the leader in loan syndications, emerging as a major player in derivatives, and earning fat trading profits.

With debt underwriting powers, approved by the Federal Reserve Board last week, Chemical bankers are talking about a global banking powerhouse that they say will someday rival J.P. Morgan & Co. and Bankers Trust New York Corp. in terms of profits and reputation.

But the wholesale division has several nagging problems to address before it can achieve its goal: shedding unprofitable businesses overseas, beefing up its investment banking talent, and convincing corporations that it can do the job of more traditional Wall Street firms.

Pullback from Overseas

Both Hanover and Chemical had pulled back from international wholesale and corporate banking before the merger. But Chemical executives say that additional pruning is needed, particularly in Europe, which accounted for 21% of the global banking division's $2.9 billion in revenues last year.

"It's just a matter of fine-tuning," said William B. Harrison Jr., vice chairman and head of the wholesale division. "In terms of actual exits, we have several things on the horizon."

Though Chemical has no plans to leave major businesses or countries, Mr. Harrison said it will shed individual businesses that are not meeting profit goals. It also may weed out relationships with large domestic and multinational corporate clients that are not major borrowers or buyers of wholesale banking services, Mr. Harrison said.

Likely Divestitures

He declined to give specifics, but analysts say likely business divestitures are the bank's corporate real estate lending business in England and its corporate banking operations in Portugal.

The bank is also expected to consolidate some back-office operations at regional centers.

Streamlining European operations and filtering out weak relationships are key to maintaining high returns at the global bank, Chemical's most profitable business.

Global banking -- comprising corporate finance, a developing market group, international services, and trading and treasury functions -- netted $822 million last year, 61% of the profits from Chemical's main businesses. The bank company as a whole earned $1.1 billion last year.

Much of the kick came from trading, where revenues climbed 27% to $853 million in 1992 from the previous year.

"We hit 95% of [Bankers Trust's] trading revenues and 89% of Morgan's last year," boasted Donald H. Layton, a senior executive vice president in charge of Chemical's capital markets group and its operations in Asia and Europe.

He doesn't expect trading revenues this year to reach 1992 levels, but believes that Chemical can sustain double-digit growth over the next few years. "We're catching up" to the big trading banks, said Mr. Layton.

Return on equity for all wholesale businesses was a strong 21.8% the bank company said, versus 12.4% for Chemical as a whole.

Handsome Efficiency Ratio

Wholesale banking is already a model of efficiency within the company. It boasts half the expense base and more than twice the profits of Chemical's consumer businesses.

But managers are under strict orders to remain vigilant about expenses by-eviscerating unprofitable product lines and redeploying assets to growth areas.

Chemical has promised investors to keep baseline expense growth to 4% this year and achieve merger-related cost savings of $750 million by 1994. Each business unit must assume its share of the pain, say executives.

"It's the most binding constraint we have right now," said Mr. Layton. "The focus this year is on what do you feed."

Raiding Wall Street

Certainly the bank is feeding its investment banking group. Chemical has been hiring specialists from Wall Street firms and commercial banks -- and transferring its own employees to securities and fixed-income trading areas groups.

Unlike Bankers Trust and Morgan, Chemical does not have equity underwriting powers. But it will focus its initial corporate debt efforts on underwriting junk bonds, an area it knows intimately from its role as a leading provider of leveraged buyout debt. The company has hired several high-yield traders and investment bankers from the outside.

They include Lawrence McCarthy, the No. 2 high-yield trader at Grantchester Securities -- the trading arm of Wasserstein Perella & Co. -- who joined Chemical two weeks ago as a managing director and head trader.

Donaldson Exec Hired

This week the bank welcomed Wilfred Finnegan, who was a managing director in the high-yield capital markets group at Donaldson, Lufkin & Jenrette Inc., to help run the new debt unit. And two weeks ago, it recruited Peter Schmidt-Fellner from Citicorp Securities to its structured finance group.

Mr. Finnegan and Mr. Schmidt-Fellner report to Salvatore Bommarito, managing director of new business originations in structured finance.

Mr. Harrison said Chemical will hire a few more high-yield specialists from the outside and add another 20 investment bankers to its team of 65 investment-grade-debt bankers.

"We're going to be careful not to overhire from the outside, yet we recognize the value of hiring and paying whatever it takes to get the right specialists in place," said Mr. Harrison.

Hefty Initial Outlay

Indeed, start-up costs for the new underwriting venture will be a multimillion-dollar effort that offsets any profits from the new activities in the initial year, analysts said.

Next year "will be the year that we see big benefits from that business," said Mark Solow, senior executive vice president in charge of corporate finance. But he says the learning process will be quick.

Just days after receiving regulatory go-ahead on May 17, Chemical underwrote its first corporate deal -- a $200 million 12-year debt issue for Long Island Lighting Co. The underwriting group included five Wall Street firms, with Lehman Brothers leading the deal.

Chemical bankers won't predict how many debt deals they expect this year. But as the lead syndicator of loans to corporations and middle-market companies, the bank knows the pressure points to touch to gain new underwriting businesses.

No Guarantees

However, experts warn, lending relationships don't guarantee underwriting success. Chemical must be particularly wary of pressuring companies for business so as to avoid the appearance of tying loan approvals to an underwriting mandate.

The issue of bank tying, which violates federal laws, is under scrutiny by regulators and some congressmen.

Chemical also realizes that for all its internal pride, corporate America hardly views it as the cream of investment banking. It will harvest most of its new business, experts say, from companies that Wall Street traditionally leaves behind.

Mr. Layton, for his part, says that his bank's capacities are underrated, but he doesn't underestimate the hurdles ahead.

The bank's reputation isn't as good as it deserves to be, he said. "This makes our business development efforts go slower."

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