NationsBank Corp.'s acquisition of Boatmen's Bancshares may or may not bring all the financial benefits promised. But it surely solidifies the heir-apparent status of NationsBank's No. 2 executive, president Kenneth D. Lewis.
Mr. Lewis, 49, will have most of the old Boatmen's organization reporting to him in Charlotte when the deal closes next January. A recent organizational scheme announced by NationsBank placed under his control NationsBank West, which includes all the Boatmen's territory plus NationsBank's existing Texas operation. Mr. Lewis will also oversee the combined asset management business, based in St. Louis.
During a recent interview in his Charlotte office, Mr. Lewis politely punted a question about whether the Boatmen's deal plays to his own strengths in retail banking. He has run NationsBank's retail operations - the most profitable of its three big divisions - since 1990.
"I think it plays to our strength," he replied. "That's not a Ken Lewis issue; that's a NationsBank issue."
The Boatmen's acquisition would increase the retail operation's share of overall revenue generation to 81% from the current 71%. But making the deal work depends on integrating the Boatmen's branches into NationsBank's network. And that hinges on the "model banking" program, a mammoth effort to convert all the company's branches to a common sales culture and technology platform.
Mr. Lewis has supervised the program since its inception in the early 1990s.
He expressed confidence that model banking would be implemented across 60% of NationsBank's existing territory by yearend, with the remainder to be completed next year. Boatmen's, added to the tail end of that schedule, should be fully incorporated by 1998, he said.
Your acquisition of Boatmen's disappointed many people on Wall Street, who had been convinced NationsBank would focus on profitability this year and avoid big, dilutive acquisitions. Your response?
LEWIS: We are, and have been, focused on getting better at what we do. At the same time, we said over and over again, our strength is integrating banks.
We think the addition of consumer, small-business, and middle-size business revenues is attractive to us because it increases that mix as a percentage of our total business, and the market will ultimately give us a higher multiple. It's more predictable in terms of giving more consistent earnings.
In the first year of our existence as NationsBank, in 1992 (after the integration of C&S/Sovran Corp.), our General Bank had a 15% return on equity. In 1996, it has a 22% ROE. We're just going to do that again.
At the end of the day, this is going to be a revenue story much more than an expense savings story. The real attractive thing to me, as I get closer to the people at Boatmen's, is the fact that we're going to be able to sell a lot more. We know the average Boatmen's consumer banker is selling less products per day than an average NationsBank person. We think, through the measurement and incentive programs we can bring to bear, that we can improve that.
Some analysts have criticized NationsBank for continuing to follow the "old paradigm" of banking by acquiring large branch networks, as with Boatmen's. Does that still makes sense in an era of alternative delivery and electronic banking?
LEWIS: I can understand how people can be misinformed about that. We buy customers. This is still the best way I know of to get customers en masse and then have the ability to become more convenient to them as they change the definition of delivery.
We still see our high-value customer segments using branches. Obviously, you're seeing less of that, and we're closing branches as we see the opportunity to do that. We're adding in-store branches, ATMs, PC banking, and 24-hour call centers.
So we're not buying banks for their branches. It's the customers that are attached to that distribution channel. I don't think that's an archaic way of doing it. The industry is evolving, but it's the best way I know of to get the customers.
A lot of nonbank financial institutions - such as Merrill Lynch & Co. and Fidelity Investments - can acquire their customers through "800" numbers and direct mail. Why can't you?
LEWIS: What if you can do both? We're doing the same thing. We're acquiring them through direct mail. We're acquiring them by telephone sales efforts. Then we acquire them by buying other banks. I don't think doing it only one way is the most effective to get the comprehensive base of customers we want.
Where does NationsBank stand on the matter of branch downsizing? Some companies, like Wells Fargo, have been very aggressive in pruning their networks in favor of cheaper alternatives such as in-store facilities.
LEWIS: We've been closing or selling between 100 and 150 branches a year. We think customer preferences are changing at about that pace. What we're trying to do is change with preferences but not get too far ahead of them. I don't know where that would put us in the industry, maybe about in the middle of the pack.
We don't feel the need, nor do we think it's prudent, to have massive closings of branches. Wells' view of the world would be more aggressive than mine.
Several years ago, you had high hopes for acquiring more credit card portfolios but haven't done any major deals since then. What happened?
LEWIS: You're right. I have said in the past that I'd like to buy credit card portfolios. But we have not been able to make the arithmetic work. I think something would have to happen before the arithmetic would work - that is, some disruption to the market.
I would be pessimistic about being able to acquire more unless there's some unusual event in the marketplace. Our plan now is to grow internally and do it right. We'll be opportunistic if something ever appears - at the right price.
NationsBank has also lagged competitors, such as First Union Corp., in buying asset management companies. Are you not interested in building a national trademark mutual funds group?
LEWIS: It is true that we have not talked about it as much. But we have been aggressively hiring people to make sure we have good returns. We've made some changes in our structures to attract people. We've been looking at our direct marketing capabilities and bringing in people to help us with that.
We're going the route of building that Nations funds brand as one that would be a choice for customers. Boatmen's, with its trust assets, helps a lot.
We have looked at a lot of asset management companies. But analogous to bank card, we have never been able to make those prices work.
For the last five years or so, we've had a very benign economic environment for banks. Do you see any big problems looming on the horizon?
LEWIS: I can't see any. As we look at our credit statistics, they still remain outstanding. They're at the lower end of our ranges. We've had mixed signals, as everybody else, on the economy. But I can't say anything more than that it just seems to be rocking along.
We've had increased losses in the bank card portfolio, but they remain about 100 basis points below our peer group. So even where we take the heaviest losses, it's not something that's alarming. Our other statistics are actually improving, that is, consumer losses in general.
The commercial side is the same way. Every once in a while, you'll have a big chargeoff on a single loan. But in the aggregate, those numbers are outstanding.
As far as I can see, we have a few more years of nice sailing.