UnionBanCal Corp. plans to invest the proceeds from the sale of its retirement record-keeping business in its fee-based asset arm, HighMark Asset Management.
"We will grow" HighMark "by adding distribution" and "by adding to our presence with wealthy investors. It is a business where we have to be open to acquire, in order to grow," said Johannes Worsoe, an executive vice president and head of global markets for UnionBancal's Union Bank of California subsidiary.
The company is selling its retirement record-keeping unit to Prudential Retirement, a subsidiary of Prudential Financial Inc. of Newark, N.J., because it lacked the size to compete in the business, he said.
"We had a couple hundred thousand participants, but you need at least a million to have scale," Mr. Worsoe said. "As a regional bank, we have to be disciplined about what we manufacture and what we sell. As a manufacturer, we just didn't have enough scale, so we just want to be a distributor."
To stay in the business, Union Bank would have needed to invest heavily in technology to enhance products, services, and the operation's overall processing environment, Mr. Worsoe said.
Prudential Retirement had $157 billion in retirement account values on Sept. 30, serving 3.2 million participants. Prudential agreed to pay $103 million for Union Bank's retirement record-keeping business, which has 670 plans, 170,000 participants, and assets of $8 billion. The deal was announced Wednesday of last week and is expected to close by yearend.
Union Bank, which is mostly owned by Mitsubishi UFJ Financial Group Inc., expects to record an after-tax gain of about $59 million, or 43 cents a share, on the sale.
Mr. Worsoe said the proceeds will be used to boost Highmark's assets under management. HighMark has $23 billion of assets under management, and the company expects to reach $30 billion to $40 billion by 2012.
"Over the next three years, you will see us do an acquisition in this space," he said in an interview Thursday. "Not in the near term, but over the next two to three years we will make an acquisition with our distribution in mind and our products in mind."
Mr. Worsoe said the HighMark Funds, its proprietary fund family with $7 billion of assets under management, need more international products.
Analysts said many regional banks have abandoned their proprietary fund units for the same reason Union Bank is selling its retirement record-keeping business — lack of scale. Mr. Worsoe said Union Bank will keep its fund business. "We are committed to our mutual funds and to our asset management business," he said. "We want to invest in our asset management business. When we look at redeploying capital from this acquisition, HighMark is very high on our list."
Mr. Worsoe said one of the terms of the Prudential deal — Prudential's agreement to add HighMark's funds to its investment offerings for retirement plans — is a good indication of Union Bank's commitment to asset management.
He said HighMark must expand distribution externally, specifically to institutional clients, to expand its business. The company is developing distribution to wealthy individuals, institutional investors, and regional broker-dealers, Mr. Worsoe said.
"The future for HighMark is largely outside of the bank," he said. "With the exception of the high-net-worth space, when we think about distribution of our mutual funds and the growth of our asset management business, it is more of an external play for us. This is an important source for Union Bank to maintain a diversified earnings stream."
Jamie Kalamarides, senior vice president of Prudential Retirement, said 30% to 40% of the retirement record-keeping customers that Prudential has agreed to acquire from the San Francisco company are in Union Bank's West Coast territory. Union Bank had 323 banking offices in California, Oregon, and Washington, and two international offices.
"This deal significantly enhances our position on the West Coast," Mr. Kalamarides said. "We are getting more than just scale. We are getting two offices in Los Angeles and Portland, Ore., relationship managers, and salespeople. This allows us to have a servicing organization there."
He said Prudential plans to hire 40 to 50 of Union Bank's retirement record-keeping staff members for the two offices. "We had a national presence already before this deal, but we wanted to make a greater investment in the West Coast," he said. "We are comfortable now with our presence nationally."
