At a time when many bankers are looking to their trust operations for new revenue, income growth is actually declining, an American Banker survey shows.

Thanks to cutthroat competition from nonbanks and slower asset growth, trust income for the 100 largest players rose by just 6.9% last year. (See tables starting on page 6.)

That compares to 7.5% in 1990 and double-digit growth for much of the 1980s.

Meanwhile, mergers are concentrating trust business into fewer hands.

The findings raise two fundamental questions: How much potential does the market really hold? And how much can bankers rely on trust business to make up for the lack of loan demand? The answer to both appears to be: not very much.

"You've got to be fairly cautious about the prospects for this business," said Thomas Abraham, a consultant based in New York. "Senior [bank] management is very sanguine about the prospects for trust. I think they are being naive."

There was some jostling in the top positions. J.P. Morgan and Co. remained No. 1, but Bankers Trust New York Corp. overtook Citicorp for No. 2.

While several new banks entered the ranks of the top 30 trust service providers in this year's survey, they did so primarily by merger. Indeed, those banks that showed significant percentage gains in trust income either did so because they merged with sizable institutions or because the bank had previously done little to sell trust services.

However, bankers remain committed to trust to generate fees and protect against losses in lending. "Banks have a franchise in trust," said John Spiegel, chief financial officer of SunTrust Banks Inc., Atlanta, speaking at a recent conference of bank analysts. Banks need to "reach into" that franchise, he said.

"We see a series of market dynamics that we find attractive," said Susan E. Rau, executive vice president at National Westminster Bancorp. Its trust business grew more than 60% in 1991, particularly in personal trust services. One positive dynamic is "the increasing wealth we see over the next 20 years - it's unprecedented, despite the recession."

With last year's stock market upturn, bankers might have expected greater growth in trust assets and, hence, in income. About 70% of banks' trust income is derived from the market value of assets; 30%, from transaction fees.

Various Factors Slow Growth

Yet despite the rebound on Wall Street, growth was slow. The reasons were different for different markets, Mr. Abraham said.

Competition from mutual funds and investment banks hurt the personal trust business. In institutional trust, pension funds grew, but other areas, such as defined benefit plans, declined, as pensioners drew off more assets than were created.

Other trust products, such as stock transfer, are past the peak of their product cycles, Mr. Abraham said.

A few banks - such as National Westminster - were more successful in boosting income, but they were the exception. And the high growth there, to $20 million in 1991, was from a very small base of $12 million in 1990.

Technology's Inhibiting Role

Essentially, the top 30 banks remained constant. One reason is that many areas in trust require sophisticated and expensive technology.

Areas such as global custody, in which banks manage investments from around the world, continue to grow but are limited to a few huge players because of the technology required. Master trust requires sophisticated software through which banks can monitor investment managers' performance in handling a portfolio.

In other areas of personal and institutional trust, banks can hire service providers.

In an attempt to capitalize on banks' desire to offer trust services, Mellon Bank has set up a trust outsourcing business to do trust processing for institutions that want to offer trust services but lack the technology.

Effects of Mergers

Mergers and portfolio sales consolidated more trust business in fewer hands. Chemical Banking Corp., NationsBank Corp., and Fleet Financial Group rose in the trust income rankings for 1991.

NationsBank and Fleet were also two of the biggest asset gainers in 1990.

Other banks would have made big jumps in the rankings by income had major mergers been completed by yearend. BankAmerica Corp. would have ranked 11th, with trust income of $299.9 million, if its mergers with Valley Capital Corp. and Security Pacific Corp. had taken place in 1991. In the current ratings, BankAmerica was 38th.

Banc One Corp. would have ranked 18th, with trust income of $154.9 million, instead of 30th, had mergers with Valley National Corp., Phoenix; Colorado National Bankshares, Denver; and Team Bancshares, Dallas, taken place by yearned.

Declines at Some Banks

Other mergers announced in 1991 included that of Society Corp. with Ameritrust Corp. in Cleveland. Had the merger taken place by yearend, Society would have ranked 15th, with trust income of $199.1 million, instead of 39th, with $68.8 million.

Other banks saw trust income decline.

Chase Manhattan Corp., one of the top five providers, saw a 6.5% decrease in income, falling behind State Street Boston Corp. to fifth place in the rankings. Marine Midland Banks Inc., Buffalo, and First American Bancshares, Washington, each reported a 10% decline in trust income, placing them 54th and 92nd in the rankings, respectively.

Trust Services of America Inc., Los Angeles, which was ranked 60th in 1990, was unranked in 1991 after it sold $4 billion of assets to Northern Trust Co., Chicago.

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