Citizens Financial Group announced an agreement Thursday to buy the commercial and consumer banking operations of State Street Corp., enabling that Boston-based company to pursue its preferred course in asset management and securities processing.

Citizens, which is based in Providence, R.I., would pay a $350 million premium to bolster its presence in the Boston area with $2.2 billion of State Street commercial loans, $1.6 billion of deposits, and five branches.

Looking ahead to the merger of regional rivals Fleet Financial Group and BankBoston Corp., "we want to be on the offensive," said Citizens chairman and chief executive officer Lawrence K. Fish. "This is a growth opportunity."

The State Street-Citizens deal, slated to close in the third quarter, would more than double Citizens' commercial business in Massachusetts and provide a sizable entree into the corporate middle market.

After the new Fleet Boston Corp., which would have $180 billion of assets when the deal closes in the fourth quarter, Citizens would be New England's second-largest banking company. Citizens was about one-tenth that size at yearend 1998.

State Street, focusing on its substantial fiduciary, securities processing, and investment management businesses, is taking the "final step away from its banking roots," said Gerard Cassidy, an analyst at Tucker Cleary Inc. "Commercial banking has been the stepchild of State Street for the last 10 years."

Marshall N. Carter, State Street's chairman and chief executive officer, said the sale would free capital to invest in fee-generating businesses. The transaction is expected to dampen earnings this year by 5% to 7%.

"Strategically, we were not an institution focused on commercial lending, so it was hard to get growth," Mr. Carter said at a press conference. "The Fleet-BankBoston deal made the property more important to a bank like Citizens that had clear strategic goals related to commercial lending."

Citizens would be in a strong position to win new customers and acquire assets to be divested as part of the Fleet-BankBoston merger, analysts said.

"They are getting a great team of lenders and a great business," said James Moynihan, an analyst at Advest Inc. "They are going to take it and run with it."

Citizens, which is majority-owned by Royal Bank of Scotland, has 105 branches in Massachusetts, including 28 supermarket locations.

The deal would bring $18.4 billion-asset Citizens a new base of customers to which it could cross-sell retail products, analysts said. But the commercial banking operations may be more strategically important.

Citizens' commercial loans in Massachusetts currently total $1.73 billion, including $850 million in commercial real estate.

"We have been a community-based retail bank," Mr. Fish said. "This makes us legitimately a balanced bank."

The State Street portfolio includes loans to middle-market companies in New England and larger companies nationwide, particularly in the communications, publishing, and security alarm industries.

People familiar with the transaction said Citizens intended to build its commercial portfolio in Massachusetts from scratch, until State Street came along with a timely solution.

All 300 State Street employees affected by the deal would be hired by Citizens, the banks said.

State Street, which is the nation's third-largest custodian, with $5 trillion of assets under administration, and the third-largest asset manager, with $525 billion under management, has been retreating from traditional banking since the mid-1970s.

"It's part of a long-term strategy to de-emphasize those businesses," said Stephen Biggar, an analyst at S&P Equity Research.

Analysts said the $50 billion-asset Boston-based company may be looking to make acquisitions internationally. Compared to its closest competitors, Chase Manhattan Corp. and Bank of New York Co., State Street's ability to do deals has been hampered by its smaller capital base.

Analysts estimated that the sale of the commercial and consumer operations would free $150 million in capital that State Street could apply to acquisitions.

Mr. Fish said he approached Mr. Carter about buying the business as long as five years ago. Serious negotiations began in December. Mr. Carter said other "national and local" banks had also expressed interest.

J.P. Morgan & Co. advised Citizens on the deal. Goldman, Sachs & Co. advised State Street.

State Street's shares closed Thursday at $86.5625, up $3.0625.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.