Making It Work

By Steve Klinkerman

Prevailing in the New England takeover wars, Fleet's Terry Murray now must gear up for revenue growth and new competition.

Terrence Murray is a master of the banking takeover game. Engineering dozens of mergers and acquisitions since 1982, he burst out of Rhode Island to devour rivals such as Bank of New England Corp. and Shawmut National Corp., building one of the nation's largest banking companies. The chairman and chief executive of Boston-based Fleet Financial Group presides over a multistate organization with more than $80 billion of assets, 35,000 employees and more than $16 billion of market capitalization.

But far from guaranteeing a bright corporate future, these outstanding achievements have only positioned Murray to pursue it. Feverishly engrossed with assimilating Shawmut and NatWest Bancorp, Murray has been somewhat distracted from the development of new skills and strengths needed for the next stage of financial services competition. And bruising merger transitions, accompanied by widespread speculation that Fleet itself would fall prey to an acquirer, freshly drove home the point that a CEO dare not let takeovers and their aftershocks indefinitely impede near-term performance.

Confronting this reality, Murray is directing a multifaceted campaign to transform his organization. He is devoting unprecedented resources to technology, marketing, alternative delivery, training and recruiting, and the development of a strong sales culture. While Murray expresses confidence and enthusiasm about this quest, he is also frank about what is at stake. Independence and opportunity hinge on growth and high performance. This means winning with customers--a much larger exercise than the technical assimilation of acquired entities.

"We've got to demonstrate our capacity to manage these businesses, to maximize the returns from what we've built," says Murray. "This is where we are--at a crossroads. If this place isn't humming within 24 months, then we are going to be in trouble."

The situation at Fleet speaks to a crucial challenge facing the leaders in banking consolidation. So far, most merger benefits have taken the form of efficiency gains and diversification--factors that help a traditional bank perform better. But the new priority is achieving both revenue and earnings growth in a converging financial services market, and this requires new skills and a new orientation.

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If they are to withstand the onslaught from savvy players such as Charles Schwab Corp., Microsoft Corp. and MBNA Corp., superregional banking companies must develop true prowess in customer information management, marketing, product development and alternative delivery. Significantly, these strengths also are the very ones needed to pull off non-traditional acquisitions, such as brokerage and insurance companies.

There will be no exact way of gauging Murray's progress, but certain characteristics define industry leaders and would not go unnoticed at Fleet. Like Charles Schwab Corp., they are delivering healthy growth and profitability, have distinctly defined businesses and recognized brand names. Like First Bank System, they are capitalizing on technology to realize phenomenal efficiency levels. Like Mellon Bank Corp., they are making substantial headway in other financial services arenas, building powerful new sources of fee income requiring less capital support. And like Wells Fargo & Co., they are using new risk management and product delivery techniques to reach markets outside their geographic franchises.

The Price of Growth

A heavy focus on consolidating and tweaking traditional banking operations got Murray where he is today--but at a price. To his credit, the executive seized on important takeover opportunities and consolidated regional operations, and he came through some enormously difficult transitions.

But merger dislocations strained employee and customer relationships along the way, to the detriment of performance and sales. And while there is no sure way of knowing, observers say a near-constant emphasis on deals probably worked against overall managerial execution at Fleet. For example, a Chandrika Tandon-led efficiency crusade, called Fleet Focus, commenced with a blaze of publicity but came to a somewhat inconclusive end when Murray struck the deal to acquire Shawmut. And problems--some quite serious--with Fleet's consumer finance, mortgage and credit card subsidiaries possibly could have been better contained had senior management not been distracted by the myriad problems attending takeovers.

Though conceding that "a certain loss of momentum" accompanies merger assimilations, Murray says it has been worth the pain to build a dominant organization having broad market penetration and the resources needed to support costly-but-vital refinements. "The franchise has been built, at least in the Northeast," he declares.

What is more, the newly-constituted Fleet is beginning to flex its muscles. The company's $311 million of first quarter earnings represented annualized returns of 18.8% on common equity--15th among the top 50 banking companies, according to Keefe, Bruyette & Woods Inc. On a linked quarter basis, however, expense reductions largely accounted for improved results. Gains from securities transactions helped somewhat, as did the fact that the loss provision did not match net chargeoffs, meaning that the company's reserve position modestly slipped to the betterment of quarterly profitability. Tellingly, revenues were flat.

Analysts greeted this performance not as some sort of final vindication of Murray's expansion strategy, but rather as a healthy starting point. "The first quarter was a step in the right direction," says Smith Barney's Henry C. Dickson. "Early this year, a lot of people thought Fleet would be sold. Now, investors are more focused on its ongoing operations. But it will take time and sustained performance to solidify market perceptions and achieve above-average trading multiples."

Still, Wall Street's enthusiasm does seem to be building. Fleet's stock surged to new 52-week highs in June as certain analysts voiced greater confidence that the institution could deliver ongoing revenue growth at the profitability levels exhibited in the first quarter. Changing hands at roughly $65 in mid-June, Fleet was valued at 13.7 times expected 1997 earnings.

Mad Scientists

Looking out over the next five to 10 years, Murray sees accelerating banking consolidation and an increasing convergence of financial services, with new combinations between banking, insurance, brokerage, investment banking, data processing and information-gathering concerns. Sophisticated technology and delivery platforms will be needed to support increasingly hybrid operations, Murray says, and players must establish distinctive product lines, marketing identities and sales cultures. Within a decade, "I would envision a company that's probably twice our current size, but that has a much broader menu of products as well as some free-standing specialty businesses."

Technology is central to this vision, and Murray is pushing hard to raise Fleet's abilities. He has earmarked $150 million for roughly 30 technology-related projects this year. Chief among them is a $40 million data warehousing project aimed at supporting customer segmentation, profitability analysis, product development, marketing and sales. Vice chairman and chief technology officer Michael Zucchini says Fleet already has converted all of its outposts to common systems, setting a solid stage for further refinements. But he notes that the technological focus now "is on revenue generation, not expense reduction," a priority Murray concedes is new to Fleet.

Leading what he cheerfully calls "the mad scientists' group," Zucchini is pursuing opportunity but also contending with a number of uncertainties and risks. Systems development entails experimentation, which nearly ensures episodes of delay and even failure. The company must invest in some promising ventures that clearly lose money today, such as PC online banking, to position itself for the future. Meanwhile, a careful eye must be kept on industry trends and alliances.

Murray says spending technology dollars intelligently is one of the single most important things he must do over the next few years. The executive retained Boston Consulting Group to assist in developing Fleet's technology strategy. Also, he asked Zucchini to lead an internal technology council that includes officers from many sectors and levels of the organization.

Murray acknowledges challenges but also points out that Fleet's large scale is crucial in unlocking resources needed for such high-dollar ventures. Fleet hopes to begin realizing some of the fruits of these efforts late this year, with a goodly portion of projects coming online through the course of 1998.

The Human Factor

Murray is broadening the governance of Fleet. With the consent of the board, he expanded the duties of two vice chairmen and long-time associates, naming Robert Higgins president and chief operating officer and giving Jay Sarles the added post of chief administrative officer. He also established a new office of the chairman, which along with Higgins and Sarles includes Gunnar Overstrom, who oversees investment management services, and Zucchini, Fleet's technology czar.

The moves establish a succession plan for Murray, 57, who says he probably will leave the scene before his official retirement date in the year 2004. Moreover, analysts are hopeful that the expanded senior management team will bring a new level of follow-through at Fleet. Higgins, for example, is seen as having a solid grasp on translating strategy into day-to-day operations.

Many other priorities cited by Murray have to do with public perception, communication and employee performance. He says the company "clearly has not completed the task" of elevating marketing skills and establishing the Fleet brand name. Along with a $50 million advertising campaign built around the theme "Ready When You Are," Murray crafted a community service strategy that gives Fleet employees paid time off for volunteer work.

Stabilizing customer relationships is a priority, as is team-building. Murray brought in a training director, Janet Banks, and is refining compensation and incentive structures. He is also stepping up recruiting, increasingly seeking people from outside commercial banking, for example from Wall Street.

Despite his commitment to these priorities, Murray will not forswear further acquisitions in the near term. He has already publicly stated he is interested in acquiring an investment management company. And in an interview, Murray says he "clearly is not ruling out" further banking acquisitions, although he cautions that the probability for near-term deals is low, given current market prices.

Delivering the Goods

So where will the growth come from? Murray's formula calls for revving core lending operations, energizing a crawling credit card unit and emphasizing fast-growing fee-based businesses.

Merger distractions did affect loan growth last year, and Fleet also shed a bloc of loans to reduce certain credit concentrations surfacing in the merged portfolio. The company can now turn fresh attention to the market. On the consumer side, there's an added emphasis on cross-sales. At the same time, it is late in the economic expansion, and Higgins acknowledges pushing loans too hard now could "come back and bite" the company. Fleet's $3 billion card portfolio has been limping, and the company is hopeful that a wave of account repricings will lift results. But Murray cautions that the overall economics of the credit card market have deteriorated, limiting potential upside.

As for fee income, Fleet is gaining ground with account service charges and investment services revenue. Fleet's corporate finance unit hopes to double its revenues this year. For now, the company seems committed to retaining and revitalizing its large but inconsistent mortgage unit. Fleet already has divested its consumer finance, corporate trust and California mortgage units and is close to selling an indirect auto lending unit.

Overall, Murray is aiming for 6% annual growth in net interest income and 10% growth in fee income. A balance sheet overhaul lifted Fleet's net interest margin but placed the company in a position of strong reliance on spread income--63% of revenues in the first quarter. Over time, Murray sees Fleet returning to an even balance between spread and fee income.

While Fleet's credit quality remains solid, Murray is making a commitment to sustaining reserve strength, and company officials believe it can be done without impacting profitability. Over the last five quarters, net chargeoffs exceeded provisions by $182 million, and that trend can't extend indefinitely. Fleet's reserve position still is strong. But Murray promises to put a floor beneath it starting with the fourth quarter, saying net chargeoffs will be offset with matching provisions. What ultimately happens with reserve ratios hinges on loan growth and quality.

In evaluating risk factors, Murray cites the economy and technology. He points to the sharp disparity in P/E multiples between banks and other industries as evidence of the market's conviction that banking's good times won't last forever. Regarding Fleet specifically, he repeatedly emphasizes the importance of making technology investments count.

Has Murray laid to rest questions about Fleet's independence?

In the near term, signals point to an answer of yes. Murray seems reasonably well-launched in his new development phase. His team shares a conviction that the tremendous energies previously devoted to acquisitions can be successfully re-channeled into upgrading the franchise. Given that Fleet is trading at nearly 270% of book and delivering ROAs in the 1.5% range, it seems unreasonable to characterize it as being in imminent danger of takeover. Murray says he has board concurrence that selling out for a one-time premium is not in shareholders' best interest, and he says a hostile run at Fleet would be quite difficult, given its more than $16 billion market cap.

On the other hand, the whole point behind Murray's performance crusade is that precious little can be taken for granted in this market. "Competition is extremely unforgiving, and only a handful of the nation's banks can be viewed as unequivocal long-term survivors," says Salomon Brothers Inc. analyst Carole Berger. "For Fleet in particular, there is no way it can be termed a for-sure, long-term survivor. As with all banking CEOs, however, Terry's odds for long-term independence will improve as he delivers growth in profitable revenues."

Mr. Klinkerman is managing editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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