J.P. Morgan is the only bank of five U.S. commercial banks reviewed that earned its cost of capital in the large corporate lending business over a five-year credit cycle, according to a report from Salomon Smith Barney. AnalystRuchi Madan, author of the report, said the ability to cross-sell nonlending products is the key to profitability. Even as the "tying" debate heats up in Washington, the point is pushed that banks have to be able to leverage lending relationships into investment banking and other services. "Talk of separating banking from investment banking doesn't make sense," Madan contends. "Banks can't be expected to destroy shareholder capital to provide bank credit to corporations." She declined to comment beyond her report.
The SSB study looks at five commercial banks--J.P. Morgan, Bank America, BANK ONE, Wachovia Bank and FleetBoston Financial -- the major U.S. banks with the largest corporate lending businesses covered by Salomon during the credit cycle of 1998 to expected 2003. Looking for a return on equity of at least 12%, Madan found that only J.P. Morgan hit that mark. The rate of return figures consider net interest income from loans, loan syndication, revenue and other loan-related fees. Comparing the banks, Madan said B of A runs a close second to J.P. Morgan with a 10% rate of return, expecting it to surpass J.P. Morgan in 2003 because of lower credit costs. Madan also cites B of A's strength in debt underwriting, interest rate derivatives and cash management. "B of A also clearly has enough product depth to cross sell to make relationships more profitable," she says. A J.P. Morgan spokesman lauded the bank's business model in the post-Glass-Steagall era. Calls to B of A officials and a spokeswoman were not returned.
BANK ONE had a 6% rate of return, but expects it to hit 10% by the end of the year due to new management in 2000 and successful cross-selling business. "We need to have a broad relationship with our corporate customers that would include lending as well as fee business, [such as] cash management, capital markets and investment management," a BANK ONE spokesman said. He added that BANK ONE has cash management down, but does not have much equity marketing or M&A to speak of. He affirmed, however, that the bank expects positive returns.
Wachovia kicked in a 51/ 2% return on equity, Madan states. She estimates that Wachovia's revenue pick-up could be difficult considering the bank does not have a leadership position in investment banking products. A Wachovia spokesman declined to comment.
Fleet was given the lowest marks, reflecting aggressive leveraged lending, high credit costs and lower cross selling levels, providing a 4% return on equity. Madan projects that Fleet could eventually, "potentially exit [the large corporate lending business] altogether." A spokeswoman from Fleet concurred that this was not an unprecedented statement. But she stated that, "[Fleet is] focused on cross selling," citing that wholesale banking is one of the company's two core businesses, in which it is dedicated to improving its capital markets and global services businesses. "We are in the midst of refocusing and we are focusing on our customers where we are the primary lender. We are absolutely committed to this business, and we see a lot of growth potential," she said.