Super-Regionals Bank on Interstate Consolidation

Quietly, almost without notice, Congress recently passed a law allowing interstate banking--and provided an object lesson that times change but visions endure in business.

Interstate banking was the great vision of Amadeo Peter Giannini, who founded Bank of America in 1904. And it was the cause of enormous controversy in the 1920s, as Giannini tried to put his ideas into practice, acquiring banks across the country--forming the present-day First Interstate Bancorp and Transamerica Corp. in the process--and preaching that banks should sell insurance and investments as well as make loans.

Banking aroused passions in those days, and Giannini’s efforts were thwarted by rival bankers in the East, Wall Street financiers, the onset of the Great Depression and laws restricting interstate branching, passed by a Congress fearful that powerful banks would control the economy.

Times change. Fearing that weak banks would undermine the economy, regulators in recent years have encouraged interstate mergers to keep bank doors open in Texas and other states suffering recession.

And so a consolidation has begun in U.S. banking, from 14,000 banking companies less than a decade ago to 10,840 today. From that pack has emerged a group of strong banks with operations in several states, known as the super-regionals. They include Nationsbank, based in Charlotte, N.C., with 1,900 bank offices in 10 states; Pittsburgh-based Mellon Bank, which this year acquired Dreyfus Corp., the mutual fund company; Los Angeles’ First Interstate, which owns 1,100 banks in 13 states and Cleveland-based KeyCorp, with more than 1,300 banks in 13 states from Alaska to Maine.

The super-regionals, large outfits at $50 billion assets and more per company, reflect a banking industry on the move. But they don’t arouse fears of concentration, as banks did when the U.S. economy was dominated by big companies. Rather, the super-regionals serve the new American economy, aiming to make loans to small and medium-sized businesses and consumers.

“It’s community banking,” says Victor Riley, chairman of KeyCorp, who started from Albany, N.Y., and built his company through acquisitions in smaller cities--Tacoma, Wash., not Seattle; Fort Collins, Colo., not Denver. It’s a “big-fish-small-pond” strategy that earns higher rates of profit than most big-name global banks--such as Citicorp, Chemical and Chase Manhattan--can muster.

That’s why the stock market accords Key, Mellon and the others a higher price-earnings ratio than the global banks.

This year, Riley, who was born in 1931--the year Giannini almost went bankrupt trying to shore up Bank of America stock against raids by speculators--made a move that caught the attention of the banking industry and pointed the way to its future. He merged KeyCorp. with Society Corp. of Cleveland to create an institution with $60 billion in assets and a major capability in managing investments.

Society was the successor to the old Cleveland Trust, a manager of industrial family money dating to the 19th Century. The new company starts out with $34 billion under management, financial products for managing 401(k) accounts and other employee benefit plans and a successful line of mutual funds.

And that’s the key to the banks’ future, says Riley. With interest rates rising on what banks have to pay for deposits and competition heating up to make loans, profits on traditional lending will narrow, he notes: “So we’ll have to do more varied business with our customers, manage their pension and employee benefit plans.”

Investment management has been thought of as the domain of the brokerage and mutual fund firms, Merrill Lynch and Fidelity and such. Bankers were deemed too slow-witted to keep up with highly paid fund managers. “But with the trust assets our company has now, we can contract out for the best money managing talent,” Riley says.

The battle is joined to manage the fabled savings of the baby boomers. That’s why Mellon Bank acquired Dreyfus. Analyst Thomas Hanley of CS First Boston says he thinks KeyCorp will take more steps, acquiring or forming a joint venture with a money management firm.

The business will grow rapidly, 12% to 15% a year, Hanley predicts. And banks could do well, because they offer loans as well as benefits management. “Because of their experience in judging credit risks, banks seem destined to maintain a key role” in financial services, says John Hoenig, president of the Federal Reserve Bank of Kansas City.

Otherwise, the strategies of KeyCorp, First Interstate and other super-regionals point up several trends in the U.S. economy:

First, that it is basically strong. Competition to make loans means there is money around, with banks vying to lend to small and medium-sized businesses.

Also, the move into asset management will force banks to greater cost reductions. “Banks have to get their costs as low as Fidelity and Vanguard and other fund outfits,” says analyst Raphael Soifer of Brown Brothers Harriman. That’s why First Interstate last week announced staff cuts and consolidation of facilities.

But most significant for California, the passage of the interstate banking law will prompt more banks to come here--and those already here to beef up operations. First Interstate Chairman Edward Carson also said last week that the bank would concentrate on its western territory and not try to go nationwide.

KeyCorp’s Riley says he understands the attraction, in a global and historic context. “Just think of what built so many cities on the Atlantic coast, from Baltimore to Philadelphia to Boston. It was trade,” he says. “They grew on trade with Europe.”

But now there are new directions. “On the West Coast, cities are growing on trade with the Pacific Rim and Latin America,” Riley notes, “and there are four times as many people in Asia as in Europe.” That’s why KeyCorp is seeking to arrange new business relationships in California, he adds.

A.P. Giannini, in his time, looked in the other direction, but the idea was the same. Vision endures.