Mega-Mergers Put to the Test
By Thomas P. Johnson Jr.
Size and scale may indeed help in retail banking, but only within the context of excellent risk management and customer service.The past half-decade or so provided one of the most promising banking environments seen in the latter part of this century. Bolstered by a vibrant economy and excellent credit quality, depository institutions pursued ever-larger mergers in pursuit of economies of scale, diversification and marketing power.
But even as new banking giants come into being, they are receiving sharp reminders that size and technological sophistication do not equate to invulnerability. The former Wells Fargo & Co. stumbled during the integration of First Interstate Bancorp as service lapses drove off customers. Wells subsequently succumbed to a takeover. More recently, the new BankAmerica Corp. suffered an earnings shock as credit problems surfaced at the California-based predecessor.
While these incidents do not necessarily undercut the rationale for size, they do underscore the fact that size alone can't be viewed as the total answer for building competitiveness and shareholder value -- especially in an era of market volatility.
The issues facing mega-bankers are brought into sharp focus at the new BankAmerica, the subject of this issue's cover story. Encompassing the former BankAmerica and NationsBank franchises, the Charlotte, N.C.-based company certainly has scale, commanding an 8% share of U.S. deposits. But as Fed chairman Alan Greenspan testi-fied before Congress, "There are no clear-cut findings that suggest bank mergers uniformly lead to efficiency gains."
On another front, a rash of troubles at the namesake pre-decessor has raised questions about risk management. As evidenced by the 11% single-day drop in BankAmerica's stock on October 14, deal excitement can quickly give way to investor disdain when performance fundamentals go awry.
BankAmerica remains a sound financial institution and will doubtless work its way through the current problems. The resignation of president David A. Coulter should not be seen as a referendum on this merger. But top industry strategists have been put on notice that risk management discipline must be reinforced even as consolidation continues.
Another crucial success factor in mergers is customer service. While sophisticated technology helps, front-line employees ultimately make or break the customer experience, asserts Bank One Corp. retail chief Kenneth T. Stevens. Top retail bankers participating in this issue's roundtable discussion on the future of branches reach much the same conclusion.
This is a further lesson that the new retail giants would do well to heed. Mergers offer opportunity, but failing to serve customers well can squander the gains of even the most carefully negotiated deal.