Chemical's Funding Strategy Will Prevail

When Manufacturers Hanover Corp. and Chemical Banking Corp. merge, the new bank will take more than Chemical's name. It also will inherit Chemical's funding strategy.

By appearing to lean more toward Chemical's reliance on low-cost, stable deposits instead of purchased funds, which dominate Hanover's liabilities, managers of the new bank are offering a clue to the wider business strategies they intend to pursue.

If Chemical plans to raise funds from retail depositors, it probably plans to emphasize retail and middle-market banking in its business strategy.

Deposits to Gain Importance

Chemical's focus "will be increasingly on middle-market and consumer [banking] and that will result in an increasing use of those sources of funds," said Raimundo Archibold Jr., an analyst at Fox-Pitt Kelton, New York.

The industry as a whole is looking more to individual depositors for funding, and over time the new Chemical will likely be part of the trend, said Lawrence Cohn, an analyst at PaineWebber.

"Clearly, the new Chemical will be a lot more retail and middle-market oriented," he said. "The reasons are straightforward. Wholesale banking stinks. The large corporate business is a lousy business from the funding and lending standpoint."

Contrasts

At the end of March, Hanover relied on purchased funds for 52% of the funding of most of its earning assets, in contrast to Chemical's net-purchased-funds reliance of 32%, according to statistics from Moody's Investors Service.

As for core deposits, the numbers were nearly reversed: Chemical's core deposits were 53% of its assets at the end of March, and Hanover had core deposits equal to 30% of its assets.

The combined balance sheet "will probably reflect the general trend away from wholesale funding," said Donald Layton, a Hanover veteran who will oversee worldwide capital markets and treasury activities.

Similarity of Ideas

But even though the two banks' funding is quite different, their views are similar.

"Philosophically, there's almost no difference," said a senior official at one of the banks. "Demand deposits are good."

Increasing the bank's reliance on deposits will not happen overnight, of course. Initially, the new Chemical's balance sheet will simply include the sum of each bank's funding accounts on the day the combination becomes effective.

Over time, the new Chemical will likely raise more core deposits. But Chemical's planned $1.25 billion equity offering could slow the shift to deposit funding. The new stock will increase the bank's liquidity, reducing its need to raise funds from any source.

The new equity could also lead to upgrades from the credit rating agencies because it will augment the new Chemical's capital base, and higher ratings would enable Chemical to consider more varied funding sources.

Fred Vogelstein contributed to this article.

PHOTO : Chemical Brings Lion's Share of Consumer Deposits to New Bank's Funding

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