CLEVELAND Internal growth is becoming the new rallying cry as the merger market slows, but Midwest bankers say tweaking revenues is proving just as challenging as digesting takeovers.

Appearing before investors at a McDonald & Co. conference held here recently, Midwest bankers bemoaned the cruel fates befalling their stocks this year. Many conceded that trading setbacks, combined with culling of weaker rivals, might dampen acquisition prospects for quite some time.

The clear implication is that many banking companies will be relying more heavily on internally-generated gains in margin and fee income to meet growth targets.

Aside from continued tight expense controls, the new environment will require even greater commitments to product development, marketing, electronic delivery systems, and deepening customer relationships, bankers told an audience of institutional investors.

Although many executives voiced optimism about their ability to handle this transition, much of their rhetoric about marketing and sales was couched not in terms of groundwork laid, but in terms of barriers to be hurdled.

"The challenge is on the sales side," said David A. Daberko, president and chief operating officer of National City Corp., Cleveland.

To be sure, most of the 23 banking companies making presentations at this conference are dealing from positions of considerable strength. Many, in fact, are among the nation's leaders in profitability.

Strength does not equate to immunity, however. Thirteen of the 23 institutions posted year-to-year declines in fee income in the second quarter, according to McDonald, with even more suffering margin compression.

That three-fourths of this population still delivered revenue gains attests to the pivotal role loan growth has played in keeping momentum alive. But as tales of deteriorating pricing and weakening loan covenants surfaced, bankers acknowledged they cannot let rapid loan expansion become a crutch.

"If you expect double-digit loan growth to be your salvation, it ain't going to happen," said Verne Istock, chairman and chief executive of the $45 billion-asset NBD Bancorp, Detroit.

Indeed, most conference participants already have been roundly thumped by investors, who worry that rising rates and slumping margins will hamper banks' ability to deliver sustained, quality revenue growth. As of today, for example, more than two-thirds of the participants were trading at discounts of at least 10% from their 52-week highs.

"It comes down to the quality of earnings," said Michael P. Durante, a McDonald & Co. analyst. "Investors foresee revenue growth stagnating, despite strong loan growth, and that's why bank stocks look unattractive."

Mergers are a longstanding line of business for many of the superregionals attending the conference, but many bankers expressed subdued outlooks for the near term, especially with regards to large transactions.

John B. McCoy, chairman and chief executive of Banc One Corp., said acquisitions still are "terribly important" to his company. However, he said a convergence of stock trading multiples had lowered the feasibility of stock-swap deals, while prior mergers and the broad recovery of the banking industry had thinned the ranks of takeover targets.

Though this year's union of Keycorp and Society Corp. sent a powerful reminder that mergers of equals also are a growth avenue, bankers at this conference seemed cool to the option. Officers expressed doubts as to whether such transactions do the best job of boosting shareholder value, and they contended most mergers work best when there is a dominant partner.

In the near term, mega-deals probably will take a back seat to in-market acquisitions of smaller rivals, many executives said.

At the same time, several top bankers said they would consider major acquisitions of fee-based businesses. Victor Riley, chairman and chief executive of Keycorp; and Eugene Miller, chairman and chief executive of Comerica Inc., both expressed openness to transactions on the scale of Mellon Bank Corp.'s takeover of Dreyfus Corp,

"In past acquisitions, we looked for geographic distribution and asset diversification. Today, the question is whether a deal will augment fee-based revenues" said Mr. Riley. Keycorp's fee income equaled 24% of total revenues in the second quarter, and Mr. Riley said the company eventually wants to lift that ratio above 40%.

Acquisition considerations not withstanding, bankers universally said they need to do more with current franchises.

Mr. Istock, for example, said NBD is working assiduously to build strong sales and credit cultures in newly-acquired operations, especially in Indiana. "Changing the old ways of doing things is arduous," he said.

And the agenda goes beyond cultural revolution.

For instance, Mr. Daberko said National City is intensifying efforts at franchise modernization. Priorities include telephone banking, database-driven marketing, and branch streamlining. "We want to get better at product development before we do another major deal," he said.

Of course, lending remains the bedrock of commercial banking, and a number of executives voiced optimism about growth. The Midwest remains a major manufacturing region, and a number of bankers contended that commercial and industrial loan demand will continue to rise even if consumer borrowing peaks.

For example, David J. Wagner, president and chief operating officer of Old Kent Financial Corp., Grand Rapids, said acquisitions and aggressive marketing are fueling a double digit annualized loan growth rate at his banking company. And he said Old Kent's managers "have not reduced credit standards."

In addition to fairly bright loan growth prospects, many Midwest banks are poised to capitalize on efficiencies achieved through prior mergers.

For example, Mr. Miller of Comerica said his Detroit-based banking company recently completed all the systems conversions required under the June 1992 merger of equals with Manufacturers National Corp., and will fully realize projected annual cost savings of $145 million by year end.

But not much is being taken for granted on efficiency.

Keycorp still is hustling to realize projected savings from its merger with Society; Banc One is in the midst of a companywide consolidation that will collapse 87 bank charters down to 13; Norwest Corp. is holding out expense cuts as a major avenue for profitability gains.

"We understand that cost controls are not just the key to making money, but to surviving," said Mr. Wagner of Old Kent.

Although the air was thick with talk about further performance improvements, bankers also expressed frustration at the market's coolness.

Mr. Miller said Comerica "hasn't gotten recognition in the marketplace" for all the benefits being derived from the union with Manufacturers National. And Mr. Riley fumed that Keycorp "has one of the lowest valuations, even though it is one of the industry's highest performers."

Of course, all bankers believe their stocks are undervalued. But even officers of Norwest, among the current front-runners in trading multiples, said Wall Street should go to greater lengths in divining each institution's strengths.

"The growth opportunities for Norwest are phenomenal," contended Leslie S. Biller, an executive vice president. He cited Norwest's powerful finance and mortgage units as differentiating factors in the company's outlook.

But even Mr. Biller conceded that the quest for revenue growth, especially in fees, is a serious business. "The merger wave of 1992 and 1993 won't be repeated in the near term," said Mr. Biller, and "there are insufficient revenues from traditional banking to support double-digit growth."

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