Earnings from Funds Aren't Cutting It Yet

In recent years banks have flocked to the mutual fund management business in search of an eagerly awaited fee-income bonanza.

But with a few years' experience, they have little in their quarterly earnings reports to show for their efforts.

For example, Firstar's Portico mutual fund family makes a profit but "not yet at the level that requires it be broken out by law," said Michael E. Bills, executive vice president for investment and trusts at the Milwaukee banking company.

And a spokesman for Crestar Bank, Richmond, Va., conceded that the banking company's $2.2 million in sales of proprietary and third-party funds is "clearly not a material source of earnings."

Indeed, the overall absence of mutual fund results in host-bank quarterly statements has given rise to concerns that the fund business has fallen far short of expectations.

"Neither the promise nor the strategic reasons behind mutual funds are yielding significant earnings streams yet," said David Master, vice president, Optima Group, a Fairfield, Conn., mutual fund consulting company.

"We're nearing the end of an institution's ability to finesse mutual fund profitability without tangible results for bank revenue," he said.

To be sure, a few banks are proudly trumpeting their gains in the mutual fund business. Mellon Bank Corp. and its mutual fund subsidiary, Dreyfus Corp., for instance, reaped $80 million of revenues in the third quarter - though earnings results were not disclosed.

PNC Bank Corp., also based in Pittsburgh, did report more than $36 million in mutual fund investment management income in the quarter ended Sept. 30 - amounting to 13% of all noninterest income.

But for most mature mutual fund programs, revenues are insignificant compared with income from loans or even other noninterest sources, such as trust fees.

"Most fund families aren't anywhere near being the core product of their institutions," said Debra McGinty-Poteet, senior vice president and director of BankAmerica Funds Management.

But their strategic importance is undiminished by their modest contributions to income right now, she said.

"Customers have spoken in very loud voices - in millions of households - that mutual funds is how they are saving," she said.

In the absence of solid profits, some consultants believe that capturing investor loyalty and boosting market share should be the driving force behind building fund programs at banks.

Besides grabbing market share, banks have to consider mutual funds as just one part of their overall relationship with customers, they say.

"If you look at profitability, a bank might be most profitable if it only offered non-interest-bearing checking accounts and credit cards," said Richard S. Thompson, vice president for retail sales of proprietary mutual funds for Crestar Bank, Richmond, Va.

"But we as a bank could not survive doing only that."

Still, some bankers haven't given up hope that they can make more of the mutual fund business than they have in the past.

"One of our challenges is to ratchet up our pretax profit somewhere between six- and eightfold, so we can be worthy of senior management attention," said William Papesh, president of Composite Research, mutual fund subsidiary of Washington Mutual Savings Bank, Seattle.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER