First Union Corp.'s capital markets group will gain major economies of scale from the acquisition of First Fidelity Bancorp., say bank officials and industry experts.

While capital markets expansion did not drive the merger, Charlotte, N.C.-based First Union believes greater penetration in the Northeast will enhance its risk management businesses, enabling it to market its derivatives and debt underwriting services to First Fidelity's middle- market customer base.

"When you put together private placements, mergers and acquisitions possibility, foreign exchange, and risk management, the acquisition becomes significant," said Louis A. "Jerry" Schmitt Jr., managing director of First Union Capital Markets.

Experts say that First Fidelity's middle-market client base presents an especially good opportunity for First Union's growing risk management practice.

"There could be a natural flow of plain vanilla interest rate products and foreign exchange from Fidelity's clientele," said Heinz Bingelli, managing director at Emcor Risk Management Consulting Corp., noting the buildup in First Union's trading room operation.

In the last two years, First Union has hired approximately 30 Wall Street traders for its derivatives business.

The capital markets group would report to Anthony Terracciano, the current chief executive of First Fidelity, who is to be president of the merged bank.

Some experts said First Fidelity's middle-market clients would primarily be interested in lower-margin products, adding only slightly to First Union's capital markets profits.

Others pointed out, however, that First Union could provide products for an underserved middle market, which typically provide better spreads because middle-market companies tend to be noninvestment grade.

What's more, the First Fidelity clients are seen as potential customers of First Union's mutual fund business.

John P.C. Duncan, a partner in the Chicago office of Jones, Day, Reavis & Pogue, said benefits of the merger would take some time to develop.

"Putting them together won't catapult them to the first ranks of dealer banks," he said. But he added, "At the size they'll be, and with the groundwork they have laid to bring in the talent, they could fairly readily get there."

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