In a rare display of cooperation between big banks in a fiercely competitive field, KeyCorp and First Union Corp. have agreed to market one another's proprietary mutual funds.

The cross-sales agreement is the first between two banks that have each aggressively pursued the mutual fund business. Until now, only community banks have offered their customers mutual funds managed by other banks.

KeyCorp and First Union executives said the deal, which is scheduled to take effect Jan. 1, will increase distribution of both banks' funds.

"This is a competitive industry, so we had to do something innovative," said John N. Drahzal, national sales manager for KeyCorp Mutual Fund Advisers, Cleveland.

The announcement comes just days after KeyCorp and First Union said they would be the first banks to give their customers a wide selection of no- transaction fee funds by offering Charles Schwab & Co.'s OneSource in their brokerage units. Access to the no-load fund supermarket will be available at the banks at the end of the first quarter.

First Union's brokerage unit will offer KeyCorp's Victory Funds, and KeyCorp's brokerage unit will offer First Union's Evergreen and Keystone Funds, with up-front fees, known as loads.

First Union, which just last week completed its acquisition of Keystone Investments Inc., boasts $30 billion in mutual fund assets. KeyCorp has $8 billion.

The agreement brings each bank's funds into a new geographical market. Charlotte, N.C.-based First Union operates in 12 states across the Southeast and the Middle Atlantic while Cleveland's KeyCorp spans 13 states in the Midwest, Northeast, and Northwest.

At KeyCorp, Mr. Drahzal said he expects to attract at least $100 million in new assets through First Union's distribution by the end of 1997. While this amounts to just 7% or 8% of KeyCorp's projected fund sales, Mr. Drahzal said it would be a solid achievement for the first year of a new relationship.

A spokesman at First Union declined to say how much that bank expects to add to its fund assets through KeyCorp's brokerage.

While banks in the mutual fund business have long talked about increasing their sales, they have been largely unsuccessful, said Richard Strauss, a financial services analyst at Goldman Sachs & Co. In an effort to remedy that shortcoming, other banks are likely to strike up similar cross-sales arrangements, he said.

But some bankers said deal between First Union and KeyCorp holds no attraction for them.

"We have enough trouble getting (our sales people) to sell our own funds,"said R. Gregory Knopf, managing director of Union Bank of California's Stepstone Funds, San Francisco. "The only way I'd consider it is if it filled in a product gap."

Indeed, one mutual fund consultant said bank-managed funds are not well- suited to distribution outside their markets.

"All banks like to think their funds should be available elsewhere," said Geoffrey H. Bobroff, an East Greenwich, R.I.-based consultant. "That will only happen if they offer comparable service to the majors or have good investment records, and no bank has done this."

Selling a Putnam fund with name recognition and proven performance is easier than selling a KeyCorp or First Union fund outside the banks' bailiwick, Mr. Bobroff said.

Nevertheless, the new partners are optimistic the accord will increase distribution.

"We are two innovative financial services organizations, and we are recognizing the potential of cross-distribution," said Bill Ennis, president of Evergreen Keystone Investment Services at First Union.

KeyCorp's Mr. Drahzal said banks have avoided cross-sales agreements because they require trust and a strong relationship. But if a joint venture opens up distribution opportunities through another organization, it makes sense, he said.

"Let's face it, no one wants to offer anyone else's mutual funds," Mr. Strauss added. "But if you're not offering anyone else's funds you're not pleasing your clients." KeyCorp's and First Union's customers are getting diverse choices through the relationship with another and with Schwab, he said.

KeyCorp and First Union executives said they began discussions over the summer. But it is probably not a precursor to the banks merging, said Carole Berger, a bank stock analyst at Salomon Brothers. .

Still, an investor in either of these banks is likely to wonder if a merger agreement might be in their future, said Sally Pope Davis, a banking analyst at Goldman Sachs.

Executives at the two banks would not rule out similar accords with other banks in the future.

"If banks want to be strong players, we have to gain access to the same distribution channels that Putnam, Fidelity and others have access to," KeyCorp's Mr. Drahzal said. "We may not have the name recognition they have, so we have to be smarter."

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