Chemical Banking Corp. said Thursday it will slash 3,700 jobs and sell a wide range of assets, as part of a plan to cut costs by $440 million over two years.
The cutbacks are nearly twice as large as expected. But the $169 billion-asset company said the action was necessary to trim operating expenses to its goal -- 57% of revenues, down from 63% now.
The company said it planned to sell 60% of its banking operations in New Jersey; its 40% stake in the CIT Group, a finance concern; and $950 million in nonperforming real estate loans and foreclosed properties.
At the same time, Chemical plans to invest $180 million in "high-growth businesses" such as credit cards, mortgages, and global trading and investment banking.
Remaking ChemicalCost savings $440 millionJob cuts: 3,7004th-quarter charge $410 million
Slated for sale
* 60% of Chemical Bank NJ
* 40% of CIT Group
* $950 million in real estate loans and foreclosures
* 57% efficiency ratio
* 16% ROE
* 4%-6% annual growth
Source: Chemical Banking Corp.
With the move, Chemical becomes the latest big banking company to undertake a broad revamping of its businesses. Earlier this year, Fleet Financial Group, First Interstate Bancorp, and PNC Bank Corp. unveiled similarly dramatic plans.
To cover the costs of the overhaul, Chemical will take a pre-tax charge totaling $410 million in the fourth quarter, including $150 million against reserves for loan losses for the sale of the real estate assets. The bank estimated the job cuts and other actions should slice $230 million from operating costs in 1995 alone.
Chemical's chairman and chief executive, Walter Shipley, said in an interview that the bank is already in contact with potential buyers to sell off the New Jersey operations and the stake in CIT.
He added that although a large part of the cuts in costs will come from New Jersey, where $3 billion in deposits are for sale, no single part of the bank will be exempt. Even Chemical's Texas banking unit will see expenses trimmed by $50 million.
In a move aimed at improving earnings per share, Chemical will repurchase up to six million shares of its common stock over the next 12 months. This comes on the heels of a 10 million share buyback program completed by the bank in September.
The bank's goal is to achieve no growth in expenses over the next two years, while annual revenues are pegged to rise between 4% and 6% annually. Earnings per share for day-to-day operations, excluding exceptional gains or losses, should grow more than 15% in 1995 and 1996, the bank said.
The aim is to improve Chemical's operating costs as a percentage of revenues, to 57% from the 62.9% posted at the end of the third quarter. Core return on common shareholders equity should also rise, to 16% from 13.7% for the nine months to date.
"It's an aggressive program to get this corporation to a level of growth and return on equity that will be as effcient as any of its competitors," Mr. Shipley said.
Analysts expressed mixed reactions to the plan, with some concluding it will merely help Chemical maintain earnings, while others predicted it will permit the bank to better use its capital for developing more profitable operations. Chemical's plan exceeded expectations, said Keefe Bruyette & Woods' David S. Berry, because analysts originally believed the bank would save only around $300 million annually in the restructuring.
However, he pointed out that Chemical is unlikely to post big gains from the sale of its New Jersey banking operations or from its stake in CIT, a company in which Japan's Dai-Ichi Kangyo Bank Ltd. acquired majority ownership from Manufacturers Hanover Trust Corp. five years ago.
The analyst noted that Chemical paid a hefty 2.5 times book value for its New Jersey banking operations, formerly known as Horizon Bancorp., when it acquired that institution in 1989, and that it would be unlikely to obtain as much today.
Chemical will likely recover some of the $150 million in reserves it will draw down for a revaluation of realty assets, Mr. Berry said. The nonperforming loans will be revalued at 43 cents on the dollar, from 53 cents, as the bank sells them off, he noted.
Raphael Soifer, an analyst with Brown Brothers Harriman, said he was skeptical of the benefits Chemical would reap. "The bottom line is that they've given us a lot of facts and figures as to what they're doing. But at the end of the day, the earnings will be fairly in line with what analysts estimate," he said.
"What it amounts to is a plan, in anticipation of slower revenue growth, for how can we do what we're doing now better or more efficiently."
Chemical's share price rose 25 cents to $36.625 in heavy trading Thursday after the program was announced.