Since buying a broker-dealer two years ago, Regions Financial Corp. has become convinced of the potency of such deals for helping a bank gain penetration with its high-net-worth customers, according to executives from both companies.
The Birmingham, Ala., banking company reported that profits grew 8% in the second quarter, led by a 53% increase, to $24 million, in profit at Morgan Keegan, its broker-dealer. The bank has consolidated its investment management business in the Memphis brokerage firm.
William E. Askew, an executive vice president of retail banking at Regions, said that beyond profit growth the deal had enabled the company to develop its relationships with high-net-worth customers. Since Regions bought Morgan Keegan in 2001, the brokerage has added $6.5 billion of high-net-worth assets in its private-client group, which now has $29 billion.
"Before we merged with Morgan Keegan, we had a different view on high-net-worth customers," Mr. Askew said. "We were trying as a bank to be all things to all customers. We found that when clients reached a certain asset level, we'd lose that customer to Merrill Lynch or PaineWebber. Wealthy customers need a different level of financial management."
One analyst who covers Regions, Jeffrey K. Davis of FTN Financial, took a skeptical view, however. About 45% of Morgan Keegan's earnings are from fixed-income products, he said, and the two companies have produced very strong results in a strong fixed-income market that is now weakening.
Jason Goldberg, an analyst at Lehman Brothers who covers Regions, was more supportive of the Alabama bank. Given Regions' branch network and Morgan Keegan's product lineup, he said, tremendous opportunities exist for the companies to cross-sell.
"In the recent economic environment, the interest has been in fixed income," he acknowledged, "but it will switch back to equity, and Morgan has the array of products to maintain its sales even as markets shift."
A third analyst, John Pandtle of Raymond James & Associates, downgraded Regions to "underperform" on Tuesday, in part because of its heavy earnings reliance on fixed-income capital markets. He said he expects Regions' revenue and earnings growth to decelerate steadily in the next two quarters and into 2004 as market interest rates pressure fixed-income fees at Morgan Keegan.
Mr. Askew said the bank is trying to create levels of service in order to leverage the relationships it can develop with wealthy individuals and then cross-sell them banking products and services. Regions merged its brokerage company, Regions Investment Co., and its trust operations under Morgan Keegan's brand.
Lehman's Mr. Goldberg said, however, that cross-selling between a bank and a brokerage unit probably works best with corporate and institutional clients rather than with wealthy individuals.
Morgan Keegan has had record quarters since the Regions deal, Mr. Askew said.
"We have something in our footprint that most banks don't have," Mr. Askew said. "I know Bank of America and Wachovia have these services, but in the communities, in the community banks where we have developed our business, banks don't have a brokerage arm like Morgan Keegan to service their client base."
"I think if you check with the average Morgan Keegan retail office you'd probably get a mixed message on the importance of cross-selling," said Mr. Davis of FTN. "Morgan has worked with Regions, and Regions has managed not to blow it up yet. But that was in a great fixed-income market."
"A real test on this merger will come in the next year when fixed income has slowed down," Mr. Davis said. "Then we can really determine if they can sell products."
Edward R. Najarian, an analyst at Merrill Lynch Global Securities who covers Regions, said that in the second quarter the banking company succeeded in selling a specific class of fixed-income funds to its high-net-worth clients. But even as fixed-income products fall out of favor, he said, Regions has the products to continue to cross-sell.
"Banks have to go after the high-net-worth with a range of products," Mr. Najarian said. "The desire is to pull more high-net-worth banking customers and make them Morgan Keegan customers. This is what many regional banks have tried for five years now."
Regions has developed a "tiered" approach to customer service so that middle-market and upper-middle-market customers (with less than $250,000 of assets) are served by the bank and high-net-worth customers (more than $250,000) by Morgan Keegan.
James Parrish, the president of Morgan Keegan's private-client group, said that since merging with Regions his firm has gotten access to an array of customers.
"Commercial lenders always have a certain perspective on the investor that a stand-alone brokerage company doesn't have," he said. "We were on the outside looking in. If a client has a relationship with a bank, we could never be their one trusted adviser. … We want to be in a position for assets to stay with Regions and Morgan Keegan."
The merger has been successful, Mr. Parrish said, because the bank aligned its lines of business. Combining Regions' $25 billion trust business with Morgan Keegan opened up opportunities for cross-selling, he said.
Amy D. Eisner, an analyst at Friedman, Billings, Ramsey, said that although fixed income is Morgan Keegan's largest business line, its private-client group and wealth management services contribute 30% of the firm's revenue.
"I think that cross-selling between banks and brokers has had varying degrees of success, but Regions and Morgan Keegan have had more success than their other competitors have had," she said. "I am optimistic about cross-selling for them, particularly on the investment advisory side. Morgan Keegan has a specialty, and in Regions' higher-growth markets that will be attractive to customers."
When it comes to cross-selling, Mr. Parrish admitted that Morgan Keegan is not quite there yet.
"We want to be able to go to the Morgan Keegan clients and deliver Regions banking products, and we want to bring our business to their customers," Mr. Parrish said. "We offer the same banking services that other banks offer, and I think we stand a good chance of developing new business."
Lehman's Mr. Goldberg agreed that "Morgan Keegan and Regions have not fully tapped into their customer base. They have been together for less than three years. There is still a lot of room and a lot of customers to tap into."
Mr. Parrish said the bank is rolling out what it calls Rams - Regions asset management strategy. This calls for Regions to put a commercial banking representative in the Morgan Keegan branches that are outside Regions' footprint, he said.
The strategy is being tested in Fort Lauderdale, Fla., and Mr. Parrish said it has uncovered a lot of business opportunities. "We want to gain more leverage by teaming Morgan Keegan's representatives with Regions' bankers," he said.
In March, Regions said it planned to add 30 to 40 branches in new and existing markets during the succeeding 12 months. It has targeted Florida, Georgia, North Carolina, and Texas because it wants to attract wealthier customers by building on Morgan Keegan's reputation.
"We didn't want our people fighting over these customers," Mr. Askew said. "We wanted them to be thinking about what is right for the customer."
