The deal, rumored for at least 18 months, may be the first round of a possible banking merger mania. Beset by new competition and hit hard by bad Third World loans and shaky real estate portfolios, bankers increasingly view consolidation as a way of paring costs and eliminating wasteful overcapacity. Regional banks are also on the grow: last month, C&S/Sovran Corp. of Atlanta and NCNB Corp. of Charlotte, N.C., confirmed they were engaged in merger talks. If successfully concluded, the talks would produce the nation’s third largest bank, a “super regional giant” with assets of at least $116 billion and branches from Delaware to Florida and Texas. Yet marriage isn’t necessarily a panacea for the industry’s ailments. Banking experts question whether some of the deals make financial sense -and consumers fret whether the megadeals will replace their friendly neighborhood lender with regional or national chains unresponsive to communities and individuals.

Most bank analysts say consolidation is the key to survival. The decline of the New York money-center banks dates back to the mid-1970s, when institutions like Citicorp, Chase Manhattan and Manufacturers, rich with deposits from oil sheikdoms, began lending billions of dollars to shaky Third World autocracies. The crisis worsened in the go-go 1980s, when deregulation allowed banks to lend unlimited amounts of money to real-estate projects; many ventures–such as Donald Trump’s Taj Mahal in Atlantic City, N. J.–wound up floundering. About $1 billion of Chemical Bank’s $6.7 billion in real-estate loans are delinquent, and the bank holds $544 million in foreclosed property. Manufacturers Hanover is also hurting. Its $3.5 billion commercial-property portfolio is saddled with $385 million in nonperforming loans. Adding to the woes, many of the leveraged buyouts that banks helped finance during the past decade have gone sour; Jeremy Stein, associate professor of finance at MIT’s Sloan School of Management, estimates that a quarter of the large buyouts financed in the late 1980s have defaulted on their debt.

Banks have also felt pressure from businesses outside the industry. In 1960, commercial banks held 34.2 percent of total assets in this country; by 1989 that figure had dropped to just 26.6 percent. Mutual funds and money markets offer alternatives to consumers who’ve tired of stingy returns on bank deposits, and new credit cards, such as AT&T’s Universal Card, entice them with lower annual fees. Corporate lending is also under siege: Japanese and European megabanks, pension funds and other nonbank lenders have all siphoned away business from U.S. banks. Banks are also competing among themselves for a dwindling pool of corporate clients. Says Dwight Crane, professor of banking and finance at the Harvard Business School: “There’s going to have to be some reduction.” This week’s merger, he says, “is a step in that direction.”

The deal brings together two chief executives who built a friendship despite their rivalry. McGillicuddy, 60, and Walter Shipley, 55, met about 20 years ago at a Kansas City steakhouse; at last week’s press conference McGillicuddy said they first discussed the idea of a merger “a couple of years ago,” but sat down in earnest at Manhattan’s Inter-Continental Hotel on May 17. (They won’t say who first made the proposal.) Under the agreement, McGillicuddy will become the new chairman and CEO, and Shipley the president and chief operating officer; he’ll succeed McGillicuddy as CEO in 1994.

Does the deal make strategic sense? Some experts see a perfect fit. Both Chemical Bank and Manny Hanny have large retail networks in the New York area; they are well positioned to slash costs. Some 6,200 jobs, 70 branches, Chemical Bank’s headquarters-and the name Manny Hannywill all be eliminated by the merger, which is expected to save $650 million per year. While that will be painful for the dismissed workers, the merger isn’t expected to complicate the lives of consumers much: most depositors at Chemical and Manny Hanny use ATM cards that work in either bank’s machines, and Manny Hanny checks will be valid for years to come. More complicated snags-such as the banks’ differing interest rates on credit cards and mortgages-remain to be worked out.

Experts say the streamlined giant should be poised for a national offensive in the ’90s. As rules change to permit more interstate banking, some of the New York money-center banks could create retail networks to compete with healthier regional powerhouses like NCNB and Ohio’s Bane One. Analysts envision a national system of credit-card lending, trading in securities and other consumer services. “This merger will give them the resources and expertise to make themselves a national presence,” says George Parker, professor of management at Stanford’s Graduate School of Business. And while consumers might wonder whether personal banking will be lost, some analysts say the broader services will compensate. Says John Poelker, a banking analyst with Edgar, Dunn & Co.: “It’s the difference between grocery shopping at the A&P or at the neighborhood deli.”

Yet some experts are skeptical. The friendly nature of the merger might work against it, discouraging the toughness needed to save the roughly 14 percent of joint costs a year the banks are shooting for. “The problem is that there isn’t a strong acquirer,” says Frank Suozzo, an analyst with S.G. Warburg & Co. As a model, analysts point to The Bank of New York’s acquisition of Irving Trust Co. in 1988. The Bank of New York ruthlessly slashed 3,500 jobs-perhaps 3,000 of which came from Irving Trust-doubled its assets and stayed healthy. But The Bank of New York success may be rare; in many cases, banks have joined with partners only to find they’ve created a bigger, weaker bank. The Economist cites a study by FMCG Capital Strategies, a Manhattan bank consultant, which reports that 80 percent of 400 big bank mergers in the 1980s resulted in lost value for the acquirer.

If the Chemical merger is the kickoff for a larger trend, where will it end? McKinsey & Co. projects that the largest 125 bank holding companies will probably become 10 to 20 megabanks with assets ranging from $75 billion to more than $250 billion. The new mergers will likely take place in a friendly government climate. The House Banking Committee has approved a bill to provide full interstate banking in three years, and the Senate Banking Committee could soon follow. The bill also repeals parts of the Glass-Steagall Act, which prevented commercial banks from engaging in the entrepreneurial businesses conducted by investment houses, such as underwriting securities. The question remains whether the freed-up environment of the 1990s will be a boon for banks or simply grow them into even bigger troubles.

Big-bank mergers can yield big savings especially if the banks are in the same region. Four potential matches analysts watch:

POSSIBLE MERGER COMBINED AFTER-TAX INCOME* SAVINGS* (MILLIONS) (PERCENT)

Ameritrust, National City $342 23%

BankAmerica, First Interstate $1,436 33%

Continental Bank, First Chicago $415 28%

Security Pacific, Wells Fargo $944 63%

  • 1992 ESTIMATES

SOURCE: KEEFE, BRUYETTE & WOODS, INC.