Stock Issue Will Be Needed to Bolster Balance Sheet
The new, improved Chemical Banking Corp. will depend on $650 million in cost savings and a $1.25 billion common stock offering to turn two mediocre balance sheets into a single stronger one.
The bank intends to sell new common stock when the merger is completed around the end of the year, a move that will add close to a full percentage point to capital ratios of the combined Chemical Bank and Manufacturers Hanover Trust Corp.
Productivity Expected to Gain
Slashing expenses - mainly by shuttering dozens of branch offices - should raise profitability and fatten the cushion against loan losses.
"They're going to save a lot of money and that'll cover a lot of bad real estate," said one capital markets specialist, referring to the problem that has become a millstone for both banks.
However, a $550 million charge to cover restructuring costs will offset most of the savings in the first year. Nevertheless, the new Chemical expects to bring its Tier 1 capital ratio above 6% almost immediately.
That shouldn't be too hard. Even without the offering, had the merger been completed June 30 the new Chemical would have logged a second-quarter Tier 1 capital ratio of 5.57% - well above the level required under the risk-based capital rules scheduled to take effect in January 1992. Capital ratios of two local competitors, Chase Manhattan and Citicorp, are in worse shape.
"After the stock issue, new Chemical's capital ratio will certainly be higher than Chase. It's already higher than Citicorp," said Raphael Soifer, an analyst at Brown Brothers Harriman.
Underwriters for the stock offering have not been named. However, Goldman, Sachs & Co. and Morgan Stanley & Co. are advising Chemical and Manufacturers on the merger.
On the face of it, Manufacturers' balance sheet is stronger than that of the new Chemical. The bank finished the second quarter with a Tier 1 capital ratio of 6.2%, well above the pro forma number for the new Chemical bank.
But Manufacturers is less well reserved against its LDC loan exposure.
"If you put both banks on a constant provision basis, there's not much difference in terms of balance sheet strength," said one investment banker.
Moreover, a market source said the income benefits made the merger compelling nonetheless. With its strengthened capital, the new Chemical will likely be able to pay less for purchased funds and undertake more counterparty business such as swap market transactions. That will accentuate its lead over the other so-called C-banks - Chase and Citicorp.
The merger creates a capital bonus for the new bank: a nettlesome issue of preferred stock issued by Manufacturers in 1989 will be converted to common.
"It's the one piece of paper that doesn't survive the merger," a Manufacturers banker said.
Also, the combination of the banks and the plan to pay a dividend on the common stock of 30 cents a share each quarter will mean the new Chemical will pay out about $20 million less in dividends.