Corporate Trust Exodus: A Matter of When, Not If

NationsBank Corp. and BankAmerica Corp. may have chosen just the right time to exit the corporate trust business, bankers and industry consultants say.

The announcement two weeks ago that NationsBank would sell the units that hold, keep track of, and make payments on corporate bond issues came after last month's decision by BankAmerica to sell most of its institutional trust business.

Industry experts aren't asking why large trust players are quitting the business, but rather, how long it will be before many other banks in the sector leave it for good.

Once a paper-intensive business, corporate trust has increasingly been drawn to sophisticated systems that can handle "critical mass" efficiently. A handful of bank companies - such as State Street Boston Corp., Bank of New York Co., and Chemical Banking Corp. - have invested heavily in securities processing technology and now dominate the business.

The rising rate environment has also increased the cost of refinancing debt, which means fewer issues and less business for banks, which charge fees on available balances.

"Last year was not a good year for corporate trust departments," said Amy J. Errett, chairman and chief executive of Spectrem Group, a San Francisco-based consulting firm. Pretax profit margins used to be as high as 50% but are now as low as 15%, she said, and a good many banks should consider getting out of the business.

"The dam has opened," said Ms. Errett. "For the people who are still in the bubble about whether they want to get out or not, it's time to face the music."

Many bankers agree.

"There are lots and lots of banks who are seeing the handwriting on the wall," said James A. Quale, a senior vice president and division head of corporate trust at State Street Boston. His company emphatically is in the business to stay.

Although Mr. Quale declined to give specific figures, he said his bank had spent "multiples of millions of dollars" on technology. His $21.7 billion-asset institution was the sixth-largest trustee of new municipal and corporate debt issued in 1994.

"We looked at this bank in the late 1980s and decided to invest in technology," said Mr. Quale. "Hadn't we done that, we wouldn't be in the same position."

And Bank of New York, said to be a hot contender for the corporate trust business of NationsBank and BankAmerica, has spent more than $1 billion on technology for its securities processing business, corporate trust included, according to Mark F. Ferraris, a senior vice president in charge of corporate trust at the $48.8 billion-asset banking company.

According to Securities Data Co., Newark, N.J., Bank of New York was a trustee for 14.6% of the $289 billion of corporate debt issued in 1994, trailing only Bankers Trust New York Corp., which was trustee for 15.7% of this debt.

Chemical has also said it is in the corporate trust business for the long haul. Having launched an automated stock transfer system, the Geoserve imaging system, the nation's third-largest banking company has also recently introduced a bondholding accounting system, according to Karen B. Peetz, managing director of corporate debt securities services.

Ms. Peetz said that Chemical, which handles $850 billion of outstanding debt in 11,576 issues overall, has "spent a huge amount of money across the board" on technology.

Ms. Errett estimated that 1,000 banks now are involved in various aspects of corporate trust and that, in the next few years, the total would be cut in half. "This is the year to go," she said. "Past this, you're dead."

James H. McKenzie, a consultant at Spectrem, said that corporate trust businesses still fetch two to three times yearly revenues, a price level he said wouldn't hold up past this year. Mr. McKenzie, whose firm helps put together this type of deal, declined to specify prices for the last such sales.

Ms. Errett warned against getting trampled in a rush for the exit. Banks should move quickly to avoid being caught in a buyer's market, she said.

Recently, Spectrem's phones have been ringing off the hook with inquiries about the corporate trust units of NationsBank and BankAmerica, according to Mr. McKenzie.

However, he said, in the securities business it is unusual for banks to announce an intent to sell before finding a buyer. The fact that both banks are publicly looking for a suitor may cause them some headaches, he added, and even drive down the value of the units.

That is because competitors will now have a chance to court the banks' customers and perhaps take away some new debt issues.

San Francisco-based BankAmerica "had to confirm what was well known on the street," a spokeswoman said, referring to rumors that prompted the bank to make its search public.

NationsBank, spokesman Ellison Clary said, "was aware" of the fact that a premature announcement could diminish the unit's value.

"That's why we paid so much attention to customers," he said, adding that the Charlotte, N.C.-based bank sent an offering package to "select institutions that are strong in the corporate trust business." The understanding, he said, is that those institutions know how to take care of NationsBank's clients.

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