Banc One's Metamorphosis

By Steve Klinkerman

In a high-stakes transformation, John McCoy aims to mold his loose coalition of banks into a centralized powerhouse

John B. McCoy long extolled collaboration and intramural competition among Banc One Corp. affiliates. Good ideas can spring up at any point in the system, he often said, and when they do, the highly independent and enterprisingbank presidents populating Banc One's "Uncommon Partnership"--which at its 1994 peak included 88 separate banks--can be counted on to implement them rapidly and spontaneously. It would be a mistake to impose decisions, he said in a 1991 interview, because "If I tell you to do something and you don't believe it's right, then it absolutely will go wrong."

But as Banc One continued its rapid growth, rising managerial friction caused McCoy to do some painful rethinking. For example, an affiliate devised an equity loan product that yielded 250 basis points more than the nearest substitute, and with the same loss rate. The product took two long years to find its way on to three-fourths of Banc One's sales counters. A frustrated McCoy finally mandated that the product be offered everywhere in the system. It still took an additional 14 months for all the stragglers to get on board. In a 1995 meeting with the senior officers of the corporation, McCoy termed such delays "absurd," holding up the episode as evidence that the Uncommon Partnership was breaking down.

Now McCoy is hustling to realign the company. And he is traversing the most significant stretch of his career. For the first time in the professional life of this high-profile banker, each action derives from a strategy entirely of his own making.

To be sure, the executive played a pivotal role in Banc One's ascent, lifting the banking company from $17 billion to $99 billion of assets in only 10 years. But he was essentially executing a strategy crafted by his father, John G. McCoy, roughly 30 years ago. Under the senior McCoy's Uncommon Partnership, officers retained a great deal of autonomy after their institutions were acquired. Banc One monitored and supported operations behind the scenes. The allure of this independent afterlife attracted a host of merger partners into Banc One's fold. And to Wall Street's admiration, Banc One's operational and consumer product enhancements sharply boosted the profitability of acquired entities.

Related Charts

Lifting the Trading Trajectory Beating the Norm

That strategy has been rendered obsolete, however. Tight coordination is a competitive imperative in national financial services markets teeming with powerfully focused players such as Merrill Lynch and MBNA Corp. Increasingly, John B. McCoy was being held back by the Uncommon Partnership, which fostered myriad--and sometimes radical--disparities in products, pricing, strategies, operations and marketing.

Following Banc One's official retreat from many of the principles underlying John G. McCoy's Uncommon Partnership, the younger McCoy has been thrown back upon his own devices. Can he improve upon his father's strategy, the one that propelled Banc One to national prominence?

While the definitive answer to that question won't come for many years, McCoy is acutely aware of the larger context of his quest. He says his goal is to post an earnings record over the next 12 years (which would take him to retirement) that matches Banc One's record of the last 25 years. "We can set the paradigm for the next era at Banc One," says McCoy. "That's what's exciting to me. It has actually invigorated me."

Gospel According to John B.

Under McCoy's new "National Partnership", Banc One will operate national lines of business such as retail banking, credit cards, and trust and investment management, each highly centralized and managed by a senior executive. These units will share a common set of delivery channels such as branches, phone centers and personal computers. Sophisticated information systems will help Banc One align product offerings with customer needs.

McCoy aims to capture greater economies of scale and realize some of the benefits of specialization. Decisions will be made and implemented more quickly. National marketing campaigns should help build brand recognition and sales. Critically, McCoy also hopes to emerge from this transition with a new acquisitions framework that will attract and accommodate a wide universe of additional merger partners.

By pursuing this strategy, McCoy is taking on three major challenges--technology, culture and mergers--each of which speaks to a crucial management issue among the nation's superregional banking companies.

First, the new Banc One will place an unprecedented reliance on information and delivery systems of enormous scale and complexity. To a large extent, the fate of the strategy is linked to that of the system. Second, McCoy needs the enthusiastic cooperation of Banc One's employees, some of whom will lose power under the new arrangements. Despite problems with coordination, Banc One long has maintained a high-caliber workforce. It must be preserved.

Finally, McCoy must make some tough decisions about mergers. If he is to amass the national delivery system needed to support his strategy, he must undertake significant additional acquisitions. The ongoing depletion of targets--Boatmen's Bancshares Inc. is the latest trophy to elude Banc One, falling instead to NationsBank Corp.--creates a sense of urgency. At the same time, McCoy must not compromise the extensive internal restructuring currently underway. Managing priorities and timing issues while responding to acquisition opportunities as they unfold may be his biggest challenge.

Strength But No Rest

Although considerable drama surrounds this transition, McCoy fortunately is dealing from a position of strength. At an annualized 1.5%, Banc One's second quarter return on average assets ranked 8th among the nation's top 50 banking companies, according to Keefe, Bruyette & Woods Inc. Despite its considerable growing pains, the Columbus, Ohio-based company still significantly outperforms many of the superregionals vying with it for acquisitions.

On the other hand, bank-to-bank comparisons may be losing relevance in a diversified financial services marketplace driven more by customer preference than by charter type. Lean and focused financial services players are building lucrative national customer bases, and banks must learn to compete in fundamentally different ways if they are to keep up. During the four years ended June 30, for example, Dallas-based credit card company First USA Inc. racked up a 58% compound annual growth rate in net income, accompanied by a 50% compound annual growth in earnings per share. These growth rates are four times those of many banking companies, suggesting who is and isn't winning at the new game.

McCoy is mid-stride in a massive corporate overhaul involving more than 1,000 projects and commanding the full-time attention of more than 900 people. Operationally, Banc One is aggressively merging processing centers. Ninety four automated teller machine support centers are being compressed into two; the number of telephone banking centers is shrinking from 21 to two; business banking centers will plummet from 82 to four. The company hopes to realize at least $200 million of annual expense reductions by the end of 1987, followed by an additional $200 million reduction by the end of 1998.

More importantly, from McCoy's perspective, the company is aggregating splinter operations into national lines of business. Kenneth Stevens, the former president of Taco Bell Restaurants, a division of PepsiCo, was installed as head of national retail banking and will oversee six management groups. The same centralization is occurring in business banking, commercial leasing, consumer finance, mortgage banking, and other areas.

"We cannot operate efficiently while we're running multiple systems in multiple states, multiple products in multiple states, multiple advertising campaigns in multiple states," says McCoy. "It just doesn't make sense any more. McDonald's doesn't sell different hamburgers in different places. Merrill Lynch doesn't do brokerage different ways in different places. Banc One's managers must think from a national perspective, not on the basis of what's happening just in Steubenville, Columbus, Houston or Dallas."

Such talk would have been heresy under the reign of McCoy's father John G., who inherited the family-run bank in 1958 and launched the acquisition program that John B. has since taken across the Midwest. John G.'s big move came in 1967 when his then-City National Bank formed a holding company to expand across county lines. Originally called First Banc Group of Ohio, the holding company became Banc One Corporation in 1979.

As John G. McCoy began buying community banks across Ohio, he usually kept local managers--and boards--in place while centralizing back office functions in Columbus. One day in 1968, another executive in the bank coined the phrase "Uncommon Partnership" to describe this strategy during a meeting in John G.'s office. The phrase stuck and John B. McCoy, who took over in 1985, found the concept helpful in courting acquisition candidates when he began expanding Banc One beyond the confines of Ohio.

Rewiring the Company

Technology plays a pivotal role in Banc One's transformation, and implementation risks are substantial. The company has at least partially installed five of six major systems: customer information; branch platform automation; indirect installment loans; document generation; and credit card processing. The sixth and most complex--a deposit system that draws on 64 different data feeds--is on the brink of introduction at a few sites.

All of this work is supposed to be completed by the end of next year, and Banc One officials acknowledge they are operating under great pressure. "We're collapsing charters, consolidating operations and moving onto a systemwide automation platform. We said we would do that in two years, but a big chunk of the automated platform is a new system that runs live in only a few places," says Richard Lehmann, Banc One's president and chief operating officer. While it's difficult enough to build a family of monoline businesses within Banc One, "we also have to integrate them at the customer level," Lehmann adds. "If you can't figure out that part of the equation, then you have to ask why you want to operate all those businesses under the same corporate umbrella."

Banc One's managerial structure, meanwhile, is undergoing a profound realignment. When the Uncommon Partnership was in full bloom, presidents of subsidiary banks had broad discretion and broad responsibilities. Now, they are being given the choice of becoming business line managers or market development officers for commercial banking. As they move from generalists to specialists, some are entering expanded theaters of action. Ronald Baldwin, former head of Banc One's Wisconsin subsidiary, has become chief executive of Banc One's national small business banking unit.

While such changes represent a significant departure, Banc One's top officers aren't kidding themselves that changes in an organizational chart necessarily translate into changes in people's attitudes and behaviors. "There's a danger in the kind of organization we're creating," Lehmann says. "In trying to get away from one set of behaviors, you can wind up recreating them in some other form." In the destructive form of intramural competition, he says, "you've got people defining businesses by taking authority from other people--instead of making the pie bigger, they are just cutting it up in massively different ways."

Back in the Merger Chase

Against this turbulent backdrop, Banc One's financial performance appears to be holding up well, although concerns about consumer credit quality linger. Excluding the kick from this year's acquisition of Premier Bancorp, third quarter revenues rose a respectable 9% from the year-ago period, fueled by growth in credit card and consumer loans, a rising net interest margin, and rising fee income. This "top-line" growth encourages analysts, the more optimistic of whom see evidence that Banc One's national marketing initiatives are beginning to bear fruit. "Banc One's transformation . . . is now far enough developed to be seen and evaluated in quarterly results," said Goldman Sachs analyst Robert Albertson in a recent report titled National Strategy Vindicated. McCoy is outspoken on this point, declaring: "We have changed the revenue track." A nine months' ROA of 1.48% was up 3 basis points from a year ago.

Wall Street's trading outlook on Banc One also seems to be brightening. Buoyed by a rally in financial stocks and friendly analyst reports, Banc One's stock has surged, rising more than 25% between June 30 and late October. This expression of market support seems to bring closure to a lengthy era of skepticism about Banc One. The stock had languished since 1984, when rising rates pummeled a derivatives-fueled maturity mismatch, culminating in a fourth quarter loss of $200 million that year. With its price/earnings multiple nearing 14 as of late October, Banc One is gaining greater latitude to re-enter the merger game.

In fact, it would come as no surprise to seasoned Banc One observers if McCoy announces a major acquisition fairly soon, possibly within a matter of months. Company officers say their radar screen includes targets reaching $50 billion of assets.

William Boardman, head of mergers and acquisitions at Banc One, says all the transition groups and procedures established for the company's own overhaul "would be highly applicable" to the assimilation of a new banking property. As Banc One progresses with its restructuring, increasing numbers of people will complete their transition responsibilities. What's more, there is a multi-month lag between a typical deal's announcement and consummation. Thus, "with every passing day, it is becoming less and less of a problem (to strike a merger agreement)," according to Boardman.

Will the company have a tougher time attracting partners this time around? Boardman says no. He says managers now understand that consolidation, technological integration and standardization are essential elements in a successful merger--the keys to unlocking the value of the transaction.

This is not to suggest that McCoy and Boardman are fixated on mergers. McCoy says he is dead serious about demonstrating Banc One's ability to deliver internally-generated growth. He tells anybody who will listen that Banc One can deliver 13% annual growth in earnings per share over the next five years without undertaking any acquisitions. He knows the market is skeptical, as reflected in consensus projections for 11% EPS growth next year. Right now, he says, "The most important thing is to demonstrate to Wall Street that we've got an elevated earnings capability."

Analysts seem supportive but guarded, noting that McCoy has a ways to go in matching some of the strengths of certain rivals. At a time when Banc One is beginning to build national business lines, notes McDonald & Co. analyst Fred Cummings, Norwest Corp. already commands two powerful subsidiaries that operate in all 50 states--Norwest Financial and Norwest Mortgage. Moreover, Banc One is coming from behind in certain technological areas. For example, the company's customer information file system (CIF) ranked 23rd in a field of 27 in Dean Witter's 1996 technology survey.

At the same time, Banc One has some strengths that rivals would do well to match. While it's great to have national business lines and sophisticated systems, it's also great to be situated in healthy markets with an energetic workforce, and offer highly profitable products that tend to sell like hotcakes. Banc One has distinguished itself for years through its emphasis on retail, small business and middle market customers. In some important respects, it is building on a base that other institutions have yet to achieve.

One of McCoy's top priorities is assembling the right talent to sustain current performance while gearing up the National Partnership. "That's going to be one of the great challenges," says Lehmann. "Absent the right people, a great vision, strategy and structure won't work." While internal promotions and development will address much of Banc One's new managerial needs, McCoy also says he will be bringing in more people from the outside to help manage the large-scale business lines now being assembled at Banc One.

But make no mistake about who is in charge. A decision has been make to centralize Banc One, and the warm, fuzzy autonomy available under John G. McCoy's Uncommon Partnership has fallen by the wayside. Reflecting a growing trend among chief executives in the banking industry, John B. McCoy is encouraging innovation while demanding cooperation. "Once we've decided on a product structure, that's it for all affiliates," he declared at conference for Banc One's senior managers. "I will be the only person in the company who has veto power."

Mr. Klinkerman is managing editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

back to top