Spinoffs of profitable businesses rank among the biggest success stories of the decade for banks and their investors. Not surprisingly, more may be on the way.
Chase Manhattan Corp, First Chicago NBD Corp., and Norwest Corp. are among the banks that could split off specialized business lines as separate stockholder-owned units, according to a new study by a Wall Street investment firm.
Spinoffs are the result of banks' increased emphasis on shareholder value and of investors' heightened focus on the value of different business lines within banks, noted Michael L. Granger of Fox-Pitt, Kelton Inc., New York.
By setting up a separate valuation vehicle, banks can tap the unrealized market value of their strongest business units while gaining a new source of capital for growing enterprises.
The icing on the cake, Mr. Granger pointed out, is that the stock of the parent company almost invariably outperforms the market in the year after a spinoff is announced.
Shares of Cardinal Bancshares, Lexington, Ky., have risen over 35% since the bank announced in March that it would spin off Security First Network, its computer banking operations.
On May 13, the day the bank's shareholders approved a pro rata share distribution plan for Security First, Cardinal's shares jumped $9.25, to $81.75.
A number of bank spinoffs have become such impressive names that it is hard to remember they started as parts of larger entities.
An example is Mercury Finance Co., viewed as the industry leader in subprime automobile finance. Mercury was spun off by First Illinois Corp. in April 1989.
Among the oldest and most successful spinoffs is Total Systems Inc., the credit card processor set loose by Synovus Financial Corp. in August 1983.
One of the latest such plans, announced in May, is National City Corp.'s to split off its merchant and other processing activities as National Processing Co.
Among the largest potential spinoffs, for all or part of the units involved, Mr. Granger said, are the credit card business at First Chicago NBD and Global Services at Chase Manhattan.
The credit card sector at First Chicago NBD generated $302 million of net income last year, 26% of the company's total net, Mr. Granger noted.
If the bank's credit card business received an average price-to-earnings multiple for credit card companies and the rest of the bank's earnings got an average bank multiple, the overall result would be significantly higher valuation.
Specialty credit card issuers such as Capital One Financial Corp. - most of them bank spinoffs - sell at nearly 13 times earnings. First Chicago NBD sells at around nine times earnings, while the average bank multiple is nearly 11. The bank has not signaled any intention of spinning off its card business.
Chase Manhattan could be another major beneficiary if it decided to spin off its Global Services unit, which includes custody, cash management, trade services, trust, and other fiduciary services.
"Chase is one of the largest custodians in the world, with approximately $2.9 trillion in assets under administration at yearend," Mr. Granger said. The area provides 9% of the bank's net income.
With Chase's stock value lagging other banks, "a spinoff of this business at a higher price-to-earnings multiple could provide a shot in the arm for the overall valuation of the company," he said.
Chase shares trade around nine times earnings, or two full multiple points below other large banks. Shares of banks specializing in securities processing and custody trade at even richer levels. Chicago's Northern Trust Corp. trades around 13 times earnings.
Other possible candidates for separate status, Mr. Granger said, are trust and processing activities at Bank of New York, corporate and consumer credit cards and merchant processing at First Bank System, data services at Marshall & Ilsley Corp., consumer finance at Norwest and at Signet Banking Corp., and asset management at State Street Boston Corp.
One bank getting full market value for its best business unit is Fifth Third Bancorp., now trading around 17 times earnings. Midwest Payment Systems, its processing subsidiary, has a profit margin exceeding 40%, Mr. Granger estimated.
