Is Chemical Banking Corp. shooting too high in mortgages? That's what some analysts are wondering.
Despite the industrywide slump, Chemical has targeted home mortgages for annual revenue growth well into the double digits.
The New York giant hinted at the plan last week when announcing a massive restructuring. It said it had zeroed in on several businesses -- ranging from mortgages to global banking -- as "high- growth areas" that would get an investment of $180 million.
In a meeting with analysts, Chemical said mortgage revenues should climb by 15% annually over the next couple of years.
"It's optimistic," said Lawrence Vitale, of Bear, Stearns & Co. He noted that the mortgage industry is currently suffering through a sharp drop in originations and a fierce price war.
Mortgage originations are expected to fall by 22% next year, to $600 billion, according to the Mortgage Bankers Association of America.
"I think that when you sort through all of it, that 15% is probably going to represent (Chemical's) greatest challenge," said Judah Kraushaar, an analyst with Merrill Lynch & Co. He added that he is comfortable that the bank will meet its overall target.
For its part, Chemical is confident that mortgage banking, taken together with consumer lending, will post "some solid revenue growth," said Thomas Jacob, executive vice president of the company's national business group.
"On the mortgage side there will be servicing portfolio growth," he said. The bank plans to have a $79 billion portfolio of loan servicing rights by the end of 1996, up 40% from the current $55 billion.
"They are at a size where they should get scale economies and be able to leverage a low cost structure," said Mr. Kraushaar.
Also key to any sizable revenue growth will be a buildup in the bank's portfolio of adjustablerate mortgages. "There will be a significant investment in the ARM portfolio," said Mr. Jacob.
The bank plans for lending of adjustables to climb 60% between 1994-1996.
Consumer demand for adjustable loans has grown this year, with rising interest rates causing the relatively low initial rates of adjustables to look good to consumers.
Adding mortgages to Chemical's portfolio will boost income, Mr. Kraushaar said -- but not without increased use of capital.
His position is that the mortgage lending unit will have to focus on its funding advantage and superior size in order to achieve long-term growth.
One avenue may be to "create a conduit to sell other products to mortgage banking customers," said Norman Jaffe, of Fox-Pitt Kelton.
Chemical plans to market its home equity loans, among other products, through the distribution channels it picked up when it purchased Margaretten & Co. this spring.
Mr. Jacob declined to specify areas in mortgage lending that might see an inflow of investment dollars, but hinted at expansion on the West Coast.
"Clearly we certainly see California as a region where we have less presence than we desire," he said.