Is Wall Street missing out on a money-center success story?
Three giant New York banks have separately developed what appear to be highly profitable units to sell cash management and other operating services to corporations.
Because the businesses provide a steady flow of income, they are a perfect complement to the more-volatile revenue from lending and investment banking.
Reluctance to Disclose
Yet for competitive reasons, the banks that perate the units - Chase Manhattan Corp., Chemical Banking Corp., and Bankers Trust New York Corp. - are reluctant to disclose details about profits and expenses, leaving analysts unable to get clear pictures of the businesses.
The result: The banks' stock prices probably haven't gotten as big a bounce from the successes as they should have.
"The majority of investors don't understand how these operations make money, so they're not willing to give credit for them," said Diane Glossman, an analyst with Salomon Brothers who recently completed research on Chase's unit, called Infoserv, and is working on reports for other fee-based businesses.
"Given that banks are reluctant to disclose the underlying information, investors can't make a judgment whether management contentions are correct."
Another factor is that these units still make relatively small contributions to overall profitability - estimated between 10% and 25% of total net income.
What's more, analysis have not traditionally paid much attention to fee-based banking, which in addition to cash management includes such noncredit services as securities processing and trust.
To be sure, the contributions of Infoserv, Bankers Trust's Global Assets unit and Chemical's Geoserve group contribute to the banks' overall profitability, and that helps boost stock prices. But additional details would support bankers' argument that the steady earnings streams derived from fee businesses offer a cushion against boom-and-bust lending cycles.
Wall Street typically rewards institutions that concentrate on fee businesses. State Street Boston Corp. and Northern Trust Corp., for example, have 1992 price-earnings ratios of about 15 times earnings, more than one-third higher than the average money-center bank.
"These kind of businesses, when well-run, should have pre-tax profit margins in the 20-to-25% range, steady income, and low capital requirements, so they should carry better valuations in the marketplace," said Richard J. Matteis, group executive and general manager of Chemical's Geoserve subsidiary.
The units have the potential to help the stock price because they provide a high return on equity and a high return on assets, requiring far less capital than lending businesses.
Analysts frequently recommend that these units be spun off as separate companies, so that their real value to the banking company could be realized. But bankers say the units provide stability to earnings that would otherwise be more volatile.
Bankers say much of the information that would aid investors would also help their competition. Chase and Chemical report net income or revenue figures for their fee-based units. Bankers Trust has never done so, but analyst estimates are available.
In some cases, bankers may find it difficult to separate out expenses, because the units are not run as subsidiaries.
Banks make a good effort to break [these numbers] out for their own management purposes," but they cannot always identify costs and revenues, said Raphael Soifer, an analyst with Brown Brothers Harriman.
Both Chase and Chemical's merger partner, Manufacturers Hanover Trust Co., have run their fee businesses as part of the wholesale bank.
"We view this as part of the relationship banking orientation," said Mr. Matteis. "That can still work if you have a business set up as a subsidiary, but sometimes that leads to a separation of the businesses."
Bankers Trust's fee-based unit, previously named Profitco, was run as a relatively independent company. When it recently was reorganized and rechristened Global Assets, the move was in part designed to integrate it more closely with the bank.
While analysts believe the units are successful, they say banks disclose their profit information only selectively, and the businesses still do not contribute a big enough chunk of income to raise stock prices.
Results Not Visible
"Because these companies don't report on a by-line basis, we can only see them on an intermittent basis," Ms. Glossman said.
And the businesses cannot be compared with one another. Global custody means different things to different banks - it could mean total assets, or assets booked offshore.
One bank might include in global custody profits from foreign exchange transactions that arise from converting dollars to marks; another bank might not. And it is not always clear how expenses are allocated.
Investors pay more attention to the lending and trading businesses that make up nearly 80% of the typical bank's income.
The units "are still a very tiny proportion of net revenue figures," said one institutional investor who requested anonymity. "Every investor takes a look at that stuff. It's another service that ties the bank into the corporation. But it's not a swing factor."
Chase Manhattan's Infoserv is one of the most successful of these units, having grown more than 20% annually since it was started in 1987.
Chase does report Infoserv's profitablity, saying that in 1991 the unit earned more than $100 million - 20% of the corporation's total net income of $520 million in a year with commercial loan losses of $375 million.
Yet even Chase officials say it is impossible to determine whether the unit has an effect on stock price.