Merger Giving It New Muscle in Securities Services

It will take another year before Chemical Banking Corp. and the former Manufacturers Hanover Corp. completely merge their domestic and international custody businesses, company officials said.

The conversion process is critical for Chemical's competitiveness in a custody market beset by price wars and consolidation.

"There is intense downward pressure on pricing," said Jeremiah F. O'Leary, senior vice president and general manager of Chemical's global securities services division. "We think the combination gives us economies of scale that puts our costs in line with or better than the industry average."

Jobs to be Cut

The consolidation project will allow the bank to eliminate 200 jobs out of the 1,200 people employed in its custody operations by the middle of next year, Mr. O'Leary added.

Before the merger, Chemical and Manufacturers Hanover were middle-sized players in securities processing and custody.

As separate entities, they were not large enough to be cost competitive with the biggest custody banks over the long term, according to some industry observers.

But after the merger, Chemical instantly became one of the world's largest investment custodians, with some $1.4 trillion of assets under management, $100 billion of which is held abroad.

Harry Totonis, bank consultant with Booz-Allen & Hamilton, New York, said the largest players in domestic and global custody -- Bankers Trust New York Corp., Chase Manhattan Corp., Northern Trust Corp. and State Street Boston Corp. -- have economies of scale that enable them to process securities for as little as half the cost of smaller banks.

He added that the merger will make Chemical large enough to compete with these leaders.

Only 2.4% of Revenues

In 1991, Chemical is estimated to have pulled in $150 million to $200 million of revenues from domestic and global custody services, and profits of between 10% and 20%, according industry sources. Custody services represented about 2.4% of Chemical's $7 billion in total 1991 revenues.

Custody units of Chemical and Manufacturers Hanover are both reporting to Mr. O'Leary.

John J. Egan, who used to head the trust and custody lines of business at Manufacturers Hanover, recently left to take over these operations at Citicorp.

New Accounting System

Chemical will continue to use two computer systems to handle its more than 3,000 customers until the end of 1993. The bank expects to migrate all of its customers to a single system for moving securities and funds between buyers and sellers by the middle of next year, Mr. O'Leary said.

The plan is to move all customers to a new custody accounting system developed by Premier Systems, Wayne, Pa., by the end of next year. Chemical is currently testing the Premier software, which runs on Digital Equipment Corp. computers, with about 50 customers in Europe, Mr. O'Leary said.

Chemical officials are said to be concerned that the bank's domestic custody business is not profitable enough. The bank is working with a consulting firm to find ways to become a bigger player in global custody and corporate trust services, including possible acquisitions, Mr. O'Leary said.

Diane Glossman, vice president and bank stock analyst with Salomon Brothers Inc., in New York, warned that Chemical could find it difficult to win new securities processing business for the next couple of years. This is because corporations tend to shy away from handling new custody business to banks in the throes of mergers.

New York Bank Example

Ms. Glossman explained that Bank of New York is a prime example of this phenomena. She said that the institution had a hiatus in new securities processing and cash management business for a year and a half following its acquisition of Irving Trust in 1988.

But Mr. O'Leary countered that Chemical's credit rating improved after the merger, which will help it win new business.

He added that total custody revenues this year will be flat compared to last year, as new business balances out customers lost because of the merger.

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