Abstract: Profits are down. Opportunities abound. Understanding that paradox helps explain why so many players have exited the while others happily buy up the pieces Hasta la vista, corporate one major bank after another has said in the last few years. Morgan Guaranty, BankAmerica, Corestates, Wells Fargo, NationsBank, Barnett, and many others have sold off their corporate trust business. This mass exodus reflects a quiet revolution taking place in the corporate trust world. corporate trust profitability has dropped drastically. Typical margins used to be around 40%, now they're 20% to 30%. For some banks, a dramatic drop in revenue is a trigger to sell, says Jeffrey J. Powell, vice-president, new business development at First Trust Illinois and chairman of ABA's Corporate Trust Committee. two components of corporate trust profitability, float and fees, are both slipping. Corporate trustees used to get float on interest payments while the payments sat in a trustee account before bondholders cashed in their coupons or checks. Now that most bonds are registered with a depository, the trustee sends the money on payable date to the depository, which immediately credits the bondholders' accounts, eliminating float. That used to make up at least 50% of trustee compensation, says Powell. Fees have dropped because of fierce price wars. On a typical bond issue where the trustee received a $5,000 annual fee five years ago, today he'll get $2,500 or less, says Jim McKenzie, consulting director at the Spectrem Group, San Francisco. With less reward, some banks are no longer willing to take on the risk of fiduciary responsibility. While there haven't been a multitude of horror stories in corporate trust, everybody has experienced some litigation, and there have been some losses in the industry that scare people, McKenzie says. But the corporate trust business is by no means dead. Unlike many others, we're very excited about this business, says D'Arcy LeClair, senior vice-president and general manager of global trust business at Chase. Our intention is very clearly to acquire and to grow, to manage some of the more innovative sides of the product on a domestic and international basis. market will be seeing us very, very visible in that respect. Lots of potential Chase is not alone. Bank of New York, Citibank, State Street, Mellon, First Union, First Chicago, First Trust, and others are expanding their corporate trust There are opportunities all over the lot to build the book of business and to break out of offering the traditional corporate trust services, says Robert I. Landau, president of consulting firm Landau Associates in Atlanta. That's because a lot of other collateral types of activities are being performed, including funds management, escrows, custodianships, and the like. Landau was chief executive officer of NationsBank's corporate trust department until NationsBank sold its business to Bank of New York last year. Landau believes corporate trustees can start taking on other roles related to their primary business. Many institutions have looked at the corporate trust world myopically, instead of taking a broader view and saying 'OK, the economy is changing, financial transactions are changing, what is there to be taken on and how can one make some money?' he says. Gobbling up business most common corporate trust strategy is to build economies of scale in order to maintain wide margins despite the smaller fees per deal. The majority of the corporate trust business is a game of scale or volume, says McKenzie. The organizations that have, or believe they have, the equation solved for technology and operations so they can handle all that volume are acquiring businesses. Except for Chase, which has been preoccupied with the merger with Chemical, and Citibank, which doesn't act as trustee for municipal bonds or below-investment-grade bonds, the big banks that are committed to this business are buying up the corporate trust businesses others are shedding at a feverish pace. …
Publication Year: 1996
Publication Date: 1996-06-01
Language: en
Type: article
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