Like a typical celebrity marriage, the union of banks and investment products followed a whirlwind courtship. Over the last few years, most banks have gone from no investments products program to managing mutual funds, selling annuitie and brokering individual securities. At the least, almost all banks of any size are selling other companies' mutual funds.

But unlike many high-profile Hollywood marriages, there's no imminent threat of banks and investment products getting a divorce. For the most part, the marriag has been smooth sailing, but the pair has survived some bumps in the road. Bank have overcome their own marketing ignorance to penetrate the market and gain billions in managed assets. They've addressed regulatory problems and come out fairly clean--so far. Brutal non-bank competition, which has killed many banks' credit card, auto loan and mortgage operations, has been held in check--and sometimes brought inside the bank itself in the form of third-party products.

But tougher times may lie ahead. In its never-ending search for political fodder, Congress keeps turning up the heat on bank mutual funds sales. Market jitters this year, precipitated by a prolonged Wall Street slump, have caused small investors to pull out billions from funds. And consultants warn that smal and medium-sized banks managing a proprietary fund could find themselves in hot water with customers who aren't prepared for volatile markets. Beyond these immediate concerns, banks must also learn to grow assets under management beyon converting trust fund dollars they already control.

U.S. Banker's investment products survey doesn't necessarily show the lingering problems beneath a calm surface, but it does point out trends for the industry. At year-end 1993, banks' proprietary mutual fund programs showed strong growth and generated healthy fees. Third-party sales and accompanying fee data--which only a few banks chose to divulge--also showed a prosperous marriage of banks and investment products.

U.S. Banker surveyed the 100 largest bank holding companies, as listed in the U.S. Banker Top 100 (U.S. Banker, May 1994). Banks were asked about their proprietary mutual funds assets under management on December 31, 1993; fund sales and fees; third-party sales and fees; annuity sales and the number of sales; and individual securities sales and the number of sales. When banks did not provide mutual fund assets under management, U.S. Banker used data from CDA/Wiesenberger in Rockville, MD, Strategic Insight in New York and Chicago-based Morningstar Inc. From these sources, U.S. Banker calculated an estimated amount of assets under management.

Banks were reticent to reveal third-party fund sales. There are few sources for the information, except for actual third-party mutual fund vendors, who often have legal obligations not to reveal sales figures. Responses to sales of annuities and securities were few; many banks said they had no such program.

Despite the lack of data in a few categories, some clear trends emerge, particularly in mutual funds. Banks' investment products programs are thriving, but it's evident that the business is still in its infancy. For instance, bank mutual fund programs are dwarfed by industry leaders such as Fidelity Investments, which have individual funds larger than most banks' entire programs.

No Size Correlation

Save for BankAmerica Corp. and Nations Bank Corp., which had $18.1 billion and $14 billion under management, respectively, there seemed to be no correlation between asset size and funds under management at the nation's 25 largest banks, reflecting the immaturity of the market. The assets under management don't reflect Mellon Bank Corp.'s purchase of mutual fund giant Dreyfus Corp., which is expected to bring it an additional $70 billion of mutual fund assets.

The nation's largest bank holding company, Citicorp, didn't have a mutual fund program that came close to matching its status as the number one bank in the country. Citi, with assets of $216.6 billion, had a mutual fund program with $2.97 billion in managed assets. However, CoreStates Financial Corp. in Philadelphia and Minneapolis-based First Bank System--holding companies with less than 13% of Citi's assets--had proprietary mutual funds programs of nearly the same size.

The survey also illustrated the geographic differences in investment programs. West Coast banks, many with a head start on the rest of the country, had larger mutual fund programs than banks of similar size. San Francisco-based Wells Farg Bank had $52.5 billion in assets and $7.7 billion in mutual funds managed. Firs Interstate Bancorp in Los Angeles had nearly $9 billion in funds and $51.2 billion in total bank holding company assets.

The Northeast giants, however, had much less in managed funds. Chemical Banking Corp., with $149.9 billion in assets, had managed mutual fund assets of $4.2 billion at year-end 1993--a big amount by bank standards, but small considering the size of the bank. Chase Manhattan Corp., whose Vista funds have been among the mutual fund industry's best-performers, had $5.16 billion in fund assets managed. One exception was State Street Boston, which had $6 billion in mutual funds at year-end, and assets of $19.7 billion.

Mutual fund sales for 1993 were solid, even though the numbers provided by bank don't always measure last year's sale performance. While most banks posted healthy sales gains, others had monstrous ones, often indicating the merger of banks or a buyout of a mutual fund company.

Of course, the survey does not take 1994's market downturn into account. This year's market blahs have shrunk portfolios, and some nervous investors have pulled their money out of the market. Things will probably get worse before the improve. The upside of such a scenario is that much of that mutual fund money may be sunk into bank certificates of deposit.

The responses to requests about annuity sales, third-party mutual fund sales an individual securities TABULAR DATA OMITTED sales were as sparse as they were erratic. First Interstate reported the largest 1993 annuity sales, $352 million followed by NBD Bancorp, with $232.2 million.

Although third-party mutual fund sales were hard to track, survey answers did reveal some trends. Fees as a percentage of third-party sales stayed within a range of 3%-4%, indicating that fee contracts between banks and vendors vary little. Bank of America, the nation's largest proprietary bank mutual fund manager, sold $1.81 billion in third-party funds, generating fees of $61.7 million, or 3.42% of sales. KeyCorp, which provided figures for the merged Society Corp. and the old KeyCorp, reported third-party sales of $708.2 million and fees of $24.5 million--a rate of 3.46%. NBD reported fee income of $2.9 million, 3.63% of its sales of $80.4 million.

While a few banks had fee percentages as low as 2%, the 3%-4% standard held tru for smaller banks as well. Southern National Corp.'s third-party fee income was $1.7 million, or 3.73% of sales of $45 million. Zions Bancorp had third-party sales of $55.8 million and fee income of $2.2 million--or 3.89%.

Third-party fee income rates were about the only thing that seemed to be a constant, however. Banks can only hope for such predictable results in the future. A bad year or two can shrink a $1-billion fund into another $100-millio underperformer--something banks are finding out right now. Many predict a consolidation of bank investment products programs, with small banks leaving th business. Congress is bearing down on bank investment products programs with bared teeth. The ability of banks to sell annuities has been challenged both legally and in a marketing sense.

In short, banks are in for some rough flying after a pretty steep takeoff. But even with the clouds overhead, banks' investment products programs are here to stay.

TABULAR DATA OMITTED

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