Originally created 12/10/97

Swiss bank deal turns up the merger heat for U.S. banks



NEW YORK -- The $25 billion marriage of Union Bank of Switzerland and Swiss Bank Corp. puts new pressure on U.S. financial institutions to dig in at the global merger banquet.

The new United Bank of Switzerland, unveiled Monday, will be the world's second-largest bank after Japan's Bank of Tokyo-Mitsubishi, surpassing Deutsche Bank as Europe's largest bank. It will provide even more incentive for its U.S. competitors -- if they didn't already have enough -- to merge with each other, to expand their global banking reach, and to press further into nonbanking activities.

"If the room was already 85 degrees, the temperature has just risen to 90," said Michael Mayo, a banking analyst at Credit Suisse First Boston.

U.S. banks have a long way to go to reach the size of their international competitors. Chase Manhattan Corp., the largest U.S. bank, was 16th in terms of assets at the beginning of this year, at more than $366 billion, according to the American Banker, a trade newspaper. That's just over half the size of No. 1 Bank of Tokyo-Mitsubishi, at $648 billion.

Citicorp, the nation's second-largest, was 25th globally and has long been rumored to be interested in a major acquisition.

Other U.S. banks have been busy with mergers this year, in strategies aimed at getting control of a domestic regional market. In the last four months, First Union Corp. agreed to acquire CoreStates Financial Corp., NationsBank Corp. agreed to acquire Barnett Banks Inc., and National City Corp. signed a deal with First of America Bank Corp.

Banks have also flexed their muscle in the domestic brokerage business, with NationsBank Corp. buying Montgomery Securities, BankAmerica Corp. purchasing Robertson Stephens & Co., Bankers Trust New York Corp. acquiring Alex. Brown & Sons Inc. and Fleet Financial Group Inc. planning to buy Quick & Reilly Group Inc.

Globally, Merrill Lynch & Co. proposed a purchase of Mercury Asset Management Group PLC, the largest asset management company in Great Britain, and Swiss Bank Corp. acquired New York investment bank Dillon Read & Co.

Swiss Bank and UBS had already made inroads into the U.S. brokerage scene. In 1994, Swiss Bank acquired Brinson Partners Inc., a Chicago money management firm. Three years earlier, UBS bought Chase Investors Management Corp.

Domestic banks have not been as active in creating a global presence. "No bank worldwide yet has the exact scale, product depth and global reach to provide one-stop shopping to multinational corporations worldwide," Mayo said.

Bigger is not always better. Japan has seven of the world's 10 biggest banks, but the industry is beset by loan problems after the collapse of Japanese real estate markets and stock prices in the 1990s. That is not a ringing endorsement of size, said Warren Heller, research director at Veribanc Inc. in Wakefield, Mass.

U.S. banks are, in fact, some of the most profitable and efficient in the world, and they regularly achieve superior returns.

Still, to survive they need to grow, both in terms of global reach and product mix. The Swiss Bank merger "increases the likelihood that U.S. banks will look to be stronger on the world stage, too," Mayo said.

However necessary it may be for banks to find new domestic and global partners, orchestrating the mergers won't be easy, analysts said.

The banking business remains highly regulated in the United States, even with efforts to dismantle rules in place since the Depression. The UBS-Swiss Bank deal, for example, will have to clear numerous regulatory hurdles before the U.S. operations can be merged. Controls are strict in Canada and most of Western Europe, as well.

Once a deal is completed, the merged bank still has to keep its customers happy. While customers say they want the convenience of one-stop shopping for all their financial products, individuals and businesses still prefer to deal with domestic or locally-owned banks.

To expand globally, U.S. banks "have to compete with well-established banks that have tremendous loyalty and brand recognition in their client base," said Dennis Gallant, a Boston-based consultant with Cerulli Associates, Inc. "You have people in Germany who have been using Deutsche Bank for generations, or Royal Bank or CIBC in Canada."

U.S. banks that have succeeded in global banking have done so by treading lightly in local markets and quickly accommodating to local needs, Gallant added.

"You can't count on leveraging what you're doing in the U.S. and applying it overseas," he said. Citicorp has been highly successful overseas by employing local strategies, Gallant added. "They don't try to take a U.S. strategy and use it elsewhere."