Growth of Trust Revenue Flagged in '90
A sluggish year on Wall Street and cutthroat competition cut revenue growth nearly in half at the nation's biggest trust companies last year, according to an annual survey by the American Banker.
At the 100 largest firms in the trust business, the rise in revenue slowed significantly from the previous year, 7.5% vs. 13.9% in 1989. But among the top 10 trust companies the growth was stronger than average at 9.5%. (See tables.)
But even with the economic downturn in which many banks have been crippled by bad loans, trust was a bright spot in a dim financial year.
"Trust is still a strong business," said Thomas R. Abraham, a trust specialist with Andersen Consulting in New York. "There is still a reason to be bullish about the prospects, especially with the opportunity of expanding business abroad."
Mr. Abraham is referring to the burgeoning business of global custody, where trust companies do the safekeeping and accounting for foreign-issued assets. The other, bigger, trust businesses include corporate, institutional, and personal trust, as well as investment management.
Among the top 100 firms, the strong have become stronger. The top 10 companies remain almost the same this year as last, with only one new name in the last slot, Security Pacific Corp. J.P. Morgan & Co. held the No. 1 spot in trust revenues, with Citicorp again in second place. Morgan reported nearly $600 million in trust revenues, up 9% from the previous year. For the first time, the market value of trust assets for the top 100 banks exceeded $10 trillion.
But a few big banks even in the top 10 did not fare well last year. Mellon Bank Corp. and Chemical Banking Corp. reported a drop in trust revenues. In all, a dozen of the top 100 trust companies reported a decline in trust revenue in 1990.
Bankers and observers expect the top group to pull further away from the rest of the field. "The top 10 will have a larger market share of the total trust revenues in five years," said Robert M. Boyles, executive vice president at Mellon Bank.
Unlike most banking businesses, the trust business is closely tied to capital markets. The sluggishness of those markets is a primary reason for the slow growth in trust revenues in 1990.
Fees Tied to Market
Roughly 70% of the fees a bank charges trust customers rise or fall with the market value of a portfolio. If the stock market is sluggish, the portfolio's values drop, taking with it revenue. Not surprisingly, the market value of managed assets at the top 100 trust banks grew only 3.3% last year, a fraction of the 20% growth experienced in 1989 and much closer to growth that followed the stock market crash in 1987.
At the same time, the demand for trust services is in decline.
"There is not a lot of new business - the pension market is saturated and so are insurance company and mutual funds," said Mr. Abraham. "People are going after the private-banking-type assets, but that's more a slow, steady growth rather than leaps and bounds."
Some regional banks - much smaller players in the trust business - have seen their trust revenue jump in the past year. In some cases, the boosts come from acquisitions. CoreStates Financial Corp. in Philadelphia, for example, which reported $84 million in revenue in 1990, almost doubled trust revenue after acquiring First Pennsylvania last year. First Union Corp., the 27th-biggest bank in trust revenues, had a similar jump. The Charlotte, N.C., banking company had $92 million in trust revenues, nearly a 50% increase over 1989, the result of acquiring First National Banks of Florida Inc. last year.
Big Gains at Norwest
Norwest Corp. was another big gainer. The Minneapolis bank jumped to $90 million in trust revenues, from $73 million in 1989. In this case, however, the bank's emphasis on the investment management business probably helped boost revenues.
Bankers are taking the slow revenue growth in stride. "That doesn't turn us off this business," said Albert W. Mandia, executive vice president at CoreStates. Without the acquisition of First Pennsylvania, the trust business grew only 4% last year, he said. Mr. Mandia said he believes his business will see double-digit growth over the next five years.
Because revenues grew faster than market value, it is likely that the engine of growth continues to be institutional investors rather than individuals. Personal trust customers tend to give bankers a high percentage of their assets to manage.
Because of poor performance in other business lines, in 1990 trust accounted for a higher percentage of a bank's operating incomes. On average, trust revenues were 3.38% of the 100 banks' revenues, up slightly from the previous year. At the top 10 trust banks, trust accounts for almost 4% of revenues.
Shakeout Is Coming
No one doubts that a major consolidation among trust providers is imminent. For years, trust was a high-return business. In an attempt to cut expenses - trust computer systems can cost up to $100 million - and focus on profitable niches, banks have been dumping some trust businesses.
For years, the trust business was a money maker. Now, banks face stiffer competition. Brokerage houses, investment advisers, and accountants can all handle personal trust business. Corporations can act as their own debt agents. Investment banks offer global custody services.
And banks have done little to differentiate themselves, either through investment performance or by easing the delivery of services.
Mr. Abraham of Andersen Consulting said the return on equity for trust services can be as high as 80%, roughly eight times that of a typical banking business. But with increased competition and price wars, he foresees ROE dropping to 15% or 20% by 1995.
The exodus is most notable in corporate trust, where banks act as agents for corporate debt issues. Fueled by the mergers and leveraged buyouts of the 1980s, it was a high-flying business.
"In the 1990s, with the increased potential for defaults and bankruptcies, we will see a reduction in the number of corporate trust players," said Robert I. Landau, who recently retired as senior vice president at Bankers Trust Co. "We are already seeing predatory pricing as banks try to get a share of a shrinking market."
Mr. Landau estimates that 2,000 banks handle corporate trust. About 10% of them handle 90% of the business. By the end of the decade, 100 banks will control almost all of the business, he said.
Bankers Trust has invested heavily in corporate trust. It bought the business of several banks, including Wells Fargo, Bank of California. Mellon Bank, one of the perennial top 10 trust banks, sold part of its corporate trust business.
Some banks will be forced out of other trust businesses. "What we call master trust [pension funds] and [global] custody are big-bank businesses, where the smaller players are getting squeezed out because of the cost of technology required to stay in, and the global expansion," said Mr. Boyles of Mellon. [Graph Omitted] [Table Omitted]