While many on Wall Street were puzzled by Republic New York Corp.'s decision to hire a cost-cutting consultant, bank analyst Linda Stromberg said the move makes sense.

According to Ms. Stromberg, who works for M.R. Beal & Co., Republic pays its 5,500 employees too much. Salaries averaged $71,759 at Republic last year, the third-highest among 79 banks she surveyed.

Average pay was higher only at J.P. Morgan & Co. ($129,991) and at Bankers Trust New York Corp. ($103,104).

Since 1991, pay raises at Republic have been far outstripping increases in shareholder returns, Ms. Stromberg said. Her study found that salaries had skyrocketed 23.8% from 1991 through Dec. 31, 1994, while shareholder returns increased only 3.4% in that period.

Republic must shrink its full-time employee base by 10%, or 550 people, "at a minimum," if it wants to even out its salary-shareholder return ratio, Ms. Stromberg said.

Republic attributed the salary increases to investing in new businesses; it said its return on equity had remained at around 15% in spite of acquisitions.

Ms. Stromberg's survey also found that, for the last four years, Republic had one of the five worst net interest margins. Its net interest margin was 2.51% in 1994, compared to an average of 4.39% for the 79 banks surveyed.

"Republic's asset quality is generally regarded as being the best in the industry, which results in lower yields because of the relationship between risk and return," said Republic spokesman Phillip Burgess.

Republic hired Tandon Capital Associates in January. The Manhattan-based consultant is famous for helping banks do dramatic restructurings that typically include massive layoffs.

Other analysts said they were confused by Republic's cost-cutting moves. The bank's earnings jumped 13% last year with far fewer employees than most banks of its size. Moreover, Republic's efficiency ratio is 55.6%, compared to an industry average of 60% to 62%.

Republic, which has $41 billion of assets, is 40% larger than Philadelphia-based CoreStates Financial Corp., but the New York bank had one-third less expenses last year, noted Alex. Brown & Sons' Mark Alpert.

Mr. Alpert said hiring Tandon may be related to Republic's deposit base decline. The company mostly gathers deposits from wealthy individuals, but deposits have dipped 4% over the last five years, to $8.5 billion.

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