As the dust settles after a hectic round of mergers last year, this week's combination of Chase Manhattan Corp. and Chemical Banking Corp. will create the biggest bank in the country, with $300 billion of assets.
But is bigger better? Yes, say senior bankers and analysts.
"The financial services industry is in the midst of the greatest period of consolidation in its history, and we are seizing upon a truly unparalleled opportunity to create a premier global financial services company," trumpeted Chemical Bank chairman Walter Shipley when the merger was announced last year.
Mr. Shipley predicted that the new Chase would achieve double-digit per- share earnings growth, an efficiency ratio in the low 50s, and a return on equity of 18% or better.
Peter Tobin, chief financial officer at Chemical, said size is important because it both leads to economies of scale and broadens the bank's operations and the range of customers with whom it can do business.
"What it's all about is, the better your business position, the more opportunities you have for revenue growth," said Mr. Tobin.
Citing areas of activity like credit cards and securities custody, Mr. Tobin noted: "In many of these businesses, size and scale is important to gaining leadership."
The merger is expected to yield annual cost savings of $1.5 billion, or 16% of the combined banks' operating expenses, within three years. The consolidation plan includes cutting 12,000 jobs from a combined staff of 75,000 and closing up to 100 branches in the New York City metropolitan region.
The latter aspect has triggered concern among both elected officials and community activists.
Expressing opposition to the merger, New York State Sen. Franz S. Leichter recently wrote in a letter to the Federal Reserve Board and the New York State Banking Department that the deal may create the largest bank in the nation but "does almost nothing for New York and will hurt low- and moderate-income communities."
Sen. Leichter argued that branch shutdowns and the loss of 4,000 jobs in New York City mean "less convenience, less competition, and fewer choices for New York banking consumers." Ultimately, he added, "it will lead to higher bank fees."
A spokesman for Chemical played down consumer worries about the merger, noting that the post-merger bank would have the largest branch network of any institution in New York. He added that the merger "shouldn't produce a general increase in fees."
Such concerns, however, are far removed from assessments by banking analysts, who broadly hailed the merger as a major step toward strengthening the two banks.
"This transaction carries obvious benefits in terms of business position and opportunity for expense reduction," noted Salomon Brothers analyst Diane B. Glossman. "The combination of Chase and Chemical into a single entity has the attraction of creating materially stronger market shares in most of the areas where the companies do business."
And George Salem, a bank analyst at Gerard Klauer Mattison & Co. in New York, observed: "Crucially, a larger organization can afford the spending on technology that is necessary to keep pace with innovation and squeeze out weaker players."
Some analysts think the best news may lie ahead. Merrill Lynch & Co. analyst Judah S. Kraushaar predicted 1997 earnings for the new Chase of $8.75 a share, or well above other analysts' consensus forecast of $8.10. "We expect a major positive earnings surprise in the next two years," Mr. Kraushaar said.
"Longer term, we think the newly combined Chemical/Chase will attain cost advantages and an edge in generating revenues," he added. "The real story in the long term should be a decisive breakout in Roes relative to both Chemical's and Chase's historical track record."
