WASHINGTON -- While banks are enthusiastically expanding their mutual fund and retail brokerage businesses, the impact on bottom lines has been quite small so far, a Federal Reserve survey shows.

In a poll of 55 of the nation's largest commercial banks, the Fed found that just 1% of pretax net income had come from selling retail investments.

And among the 48 banks in the survey that manage mutual funds, management fees generated less than 1% of pretax net income.

The findings didn't surprise observers, who said banks are looking to mutual funds for strategic purposes rather than for quick profits.

Way to Avoid Being Vulnerable

Banks want to offer mutual funds so they can "provide the full spectrum of services to their customers, rather than have them vulnerable to somebody else picking them off," said Federal Reserve Government John P. LaWare.

As the business matures, only a handful of players can expect to get more than 10% of their income from mutual fund sales and management, said Joy P. Montgomery, president of Money Marketng Initiatives in Morristown, N.J.

Those are likely to be big banks that grow their business by purchasing fund companies, she explained.

Of Strategiv Importance

But strategically the business will remain important, even if profits don't pick up.

"It's going to be the price of maintaining a customer relationship," Ms. Montgomery said.

The survey marks the second time in a year that the Fed has closely examined the bank mutual funds business.

The Fed has been exploring the nascent field because of its implications for both banking regulation and monetary policy.

As banks move into mutual funds, they may be hampered by the high expenses of building a business and expanding it in a highly competitive market. In fact, some observers think many banks are understating those costs.

Some Real Headway

"I daresay that if the accounting were tighter, there might be a net loss," said A. Michael Lipper, president of Lipper Analytical Services in Summit, N.J.

Still, banks appear to be making some real headway in cracking the funds business.

More than 70% said they are selling funds more vigorously than last year. And most banks reported they had sold funds to between 15 and 55 of their retail depositors, up from less than 1% in 1990.

Among banks that were able to provide figures for both 1992 and 1993, retail brokerage revenues were up 26% and net income from brokerage was up 18%.

Fund sales revenues ranged from $3.2 million at the low end to $17.2 million at the high end, the Fed said.

As they proceed, banks are clearly mindful of the need to make their mutual fund businesses lay off.

"It has to add to the bottom line in the final analysis, or you go out of business," said W. Christopher Maxwell, executive vice president of the investment management unit of Keycorp, Cleveland.

At Keycorp, retail brokerage and institutional sales account for 6% of noninterest income. The rest comes from trust fees, deposit service charges, mortgage banking, and credit card fees.

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