Going where the growth is, Republic New York Corp. is stepping up its efforts to expand into domestic private banking.
The $48 billion asset-based bank is working to build its clientele of wealthy entrepreneurs in New York, Florida, and California, said Thomas F. Robards, executive vice president and chief financial officer. These are people with about $1 million to invest and no long-standing commitment to other institutions, he said.
"This is still very much a new venture for us but one we expect to grow significantly over the next five years," Mr. Robards said.
Republic has been handling international private banking for nonresidents throughout its three decades in existence, but didn't form a separate unit for domestic private banking until about two years ago.
The move into U.S.-based private banking services capped several years of efforts to find a new source of revenues outside Republic's traditional focus.
Since it was chartered 30 years ago, the bank has mainly relied on retail banking in the New York City metropolitan area, institutional wholesale banking, and international private banking.
But Mr. Robards said he believes that because the retail market in the New York area is mature, the only opportunity for growth in the bank's retail business is through acquisitions. The bank, he said, will continue to expand with purchases of individual branches, groups of branches, and smaller banks in the New York metropolitan area.
"New York City is overbanked but the economics of in-market transactions are compelling," Mr. Robards said.
"The trend toward consolidation, reducing the number of branches, and achieving economies of scale is inexorable and we intend to be part of that trend as an acquirer."
As part of its effort to build private banking - which now contributes just a small fraction of bank revenues - the bank has introduced the Republic Investment Management Account.
For a 150-basis point fee, this asset allocation product allows portfolio managers to help clients define the risks they are willing to assume and divide up their portfolios accordingly.
Each of the assets invested in is managed by a subadviser specializing in that particular asset.
Mr. Robards said Republic expects to double domestic private banking assets under management from $5 billion to $10 billion over the next three years.
Republic is not the only bank around hoping to tap into the assets of the nouveau riche.
Internal Revenue Service data testify to the rapid increase in a new moneyed class. According to the IRS, the number of tax returns with an adjusted gross income over one million dollars climbed from 14,834 in 1984 to 68,064 in 1994, the latest year for which the IRS has compiled data.
Over the same period, the number of households reporting an income of between $500,000 and $1 million climbed from 29,215 to 148,055.
Analysts are applauding Republic's private banking focus, although they noted that building a private banking business does not come cheap.
"You need a tremendous infrastructure, lots of hand holding, and a certain service level - and that costs a lot," said Marni Pont, a banking analyst who tracks Republic at Keefe, Bruyette & Woods Inc.
"You also have to be very patient, because you are trying to build up a track record."
But she and others added that the move is eminently logical.
"It makes a lot of sense because a lot of wealth has been created in markets where they already have a presence on the ground, they have a strong brand name overseas, and they can leverage off what they've learned in Switzerland" since taking a stake in Safra Republic Holdings, she said.
Said Mark C. Alpert, a banking analyst with Alex. Brown & Sons, "It's a huge market; Republic only needs a sliver of it to be successful, and they'll succeed."
Mr. Robards argues that Republic has inherent advantages compared with other competing private banks, including its long standing experience in handling international private banking, strong capital position, and reputation for safety and soundness.
Currently, a third of Republic's assets, including off-balance-sheet items and the 49% stake in Luxembourg-based Safra, are in international private banking.
Slightly over 26% of the bank's assets are in retail banking, 32% come from institutional banking, and slightly over 9% are nowfrom domestic private banking.
"Much of the expertise we already have is transferable to other markets," Mr. Robards said.
If private banking makes so much sense, then what took Republic so long to get started? Lack of a U.S. client base, Mr. Robards replied.
"When we first started out, we were only a small bank among the behemoths and most private banking customers had accounts with established names," Mr. Robards said.
"If you were going to steal a client, you usually got one that you didn't want."
The last 10 years, he said, have created a class of newly rich without established banking relationships whom Republic believes it can attract, making the same pitch it has long made to retail customers: safety and soundness.
"We're taking a conservative approach," Mr. Robards said. "What we're offering is a market rate of return at below average risk."
He added that Republic is being equally cautious about whom it is willing to take on as a private banking customer.
"One of the key elements in private banking is selecting your clients, because if they do well, you'll do well."
A bank that picks the wrong clients, he added, "will find it's is shooting at the wrong target."
Mr. Robards acknowledged that competition is stiff, but said that Republic has three advantages working in its favor: "an intrinsic understanding of the business, a long term commitment and a well defined idea of the kind of customer the bank hopes to attract.
"We're looking for people who are motivated by price but are also looking for peace of mind," he said.
"And private banking isn't something you can jump in and out of," Mr. Robards said. "We're in this for the long haul."