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Republic, The Boring Bank, Breaks Out


Finance

REPUBLIC, THE BORING BANK, BREAKS OUT

In the middle of an interview in his sleek midtown Manhattan office, Jeffrey C. Keil, the president of Republic New York Corp., pulls out a three-year-old newspaper profile of himself and points to a quote about Republic's strategy that reads suspiciously like a statement he had uttered just moments before. "The reason I saved this was to show you how boring I am," he says with a smile. "I was saying the same things in 1989 that I'm saying three years later. We've got a strategy here. It works. We just try to evolve with it."

Republic itself has been rather boring. During the 1980s, when many large banks were pursuing exciting growth strategies, the $30 billion bank stubbornly and quietly stuck to its ultraconservative way of doing business: providing "private banking" services to mostly affluent, safety-conscious customers, focusing on attracting deposits rather than on making loans, and keeping capital high and overhead low. "Whether you're talking credit quality, liquidity, productivity, or capital strength, they're head and shoulders above most other major banking organizations in the U. S.," says Thomas H. Hanley, a bank analyst with Salomon Brothers Inc.

But now, Republic is becoming a lot less boring. As other financial institutions increasingly try to recruit Republic-type customers, Keil is pursuing a surprisingly venturesome new strategy. Republic has been aggressively increasing its retail deposit base through acquisitions of troubled New York savings banks. And it is seeking to leverage off its reputation for safety by developing a line of new investment products, such as mutual funds and brokerage services. Making all this pay off, though, will not be easy. Banks' track record of selling investment products is spotty at best, and competition in the financial services industry is fierce.

Republic certainly has the wherewithal to take risks. It sits on the biggest cash cushion of all major banks: Capital, adjusted for risk, is more than 14% of its assets, vs. the 4% that many banks are struggling to meet or maintain. Its almost obsessive attention to expenses has its ratio of noninterest expense to total revenue well below that of many of its peers.

All of this has paid off on the bottom line. In third-quarter 1991, return on assets was 0.76%, and return on equity was 14.2%. Among money-center banks, only Bankers Trust Co. and Morgan Guaranty Trust Co. did better.

Even with its more aggressive strategy, Republic will remain a haven for individuals whose primary concern is preservation of capital. "Our main aim is to protect depositors' money," says the bank's legendary founder, Edmond J. Safra, in a rare interview. "Even at the price of having a lower profit, I'd rather have that than take chances." It invests depositors' funds in such high-quality securities as U. S. Treasury and agency paper, and debt issued by foreign governments.

DISASTER DOLLARS. "We focus our attention on the 15% to 20% of an individual's wealth that they want to be totally liquid," says Kenneth F. Cooper, chief financial officer at Safra Republic Holdings, Republic's Luxembourg-based international private banking affiliate. "If you're accepting large deposits like we are, and it's rainy-day money or money in case of a political disaster or economic disaster in your country, you're looking for double or triple safety." The typical account has about $500,000 to $1 million. A third of Republic's deposits are from foreign investors, and a significant share is flight capital.

Lending to customers is not a big part of Republic's strategy. "I prefer not to do loans," says Safra. "If you're liberal in lending, you've got to be hurt." The bank's balance sheet has only about 30% of its assets in loans, about half the norm for most money-center banks.

Any exploration of what makes Republic tick leads to Safra, whom Hanley describes as "the brightest person in banking that I have ever met." Low-profile but highly regarded, Safra comes from a line of financiers stretching back to the caravan trade in the Ottoman Empire. In 1983, Safra sold his Geneva-based Trade Development Bank, which specialized in private banking, to American Express Co. for $550 million.

After a rift with AmEx executives, Safra left TDB in 1985. AmEx tried assiduously to keep him out of private banking. The most egregious attempt was its infamous smear campaign: false allegations of links between Safra and Republic to drug smugglers, money launderers, and illicit arms traders. Eventually, AmEx apologized and promised to donate $8 million to charities of Safra's choosing. Safra will not comment on the episode.

International private banking is now the fastest-growing part of Republic. Since the bank launched its Safra Republic Holdings in 1988, client assets have soared from $2 billion to almost $8 billion in 1991 and are now growing close to 20% annually. "Private banking is growing fastest in Europe and growing especially fast in the Far East, where there is a huge market," says Safra. Republic is well-positioned to benefit, with branches in Hong Kong, Japan, and Singapore.

Safra owns 21% of Safra Republic Holdings as well as 29% of Republic New York Corp. His stake in Republic New York is worth $588 million. Keil, who says he speaks with Safra almost every day, compares the financier's role with that of a football coach: "He knows that he's not there on the field, so he doesn't try to execute the plays. But there's no doubt that he decides who the players are and coaches them for most of their careers."

Republic's new game plan, the move to add to its U. S. retail deposit base, stems from pressure on its core business. Not only are competitors targeting its customers but low interest rates have squeezed the spread between what Republic pays customers and what it earns on its investments. Taking advantage of some near fire sales of ailing New York savings banks, Republic acquired on the cheap Williamsburgh Savings Bank in 1987 and Manhattan Savings Bank in 1990. It is now bidding for Crossland Savings Bank, which has $6 billion in local market deposits. Republic acknowledges that the deal would be a "difficult digestion" and that the returns from Crossland won't be as good as those from previous acquisitions.

NO HURRY. Republic, nonetheless, is looking for still more deals. "Over the next three to five years, it will be a buyer's market, and they are in the driver's seat," says Hanley. Says Keil: "We think that if we can manage banks in Singapore and London that we ought to be able to manage banks in Florida and California and Texas. And we will, but one step at a time."

Republic is working hard to develop new products and services for its growing customer base. It has filed for a discount brokerage license and will work with Dreyfus Corp. to roll out a line of branded mutual funds in the U. S., which is expected to be launched within six months. "We're not talking about introducing anything that hasn't been done for the last few thousand years, but we're branding it, saying that you can have confidence in it because you're buying it from Republic," says Thomas F. Robards, executive vice-president and treasurer for Republic New York. "It's just like if you buy a certain brand of aspirin, you feel confident because, say, it's Bayer that is delivering."

In a sense, Republic currently resides somewhat uneasily between its past and its future. While Robards compares its services to a packaged-goods product like aspirin, its latest annual report offers another quite different metaphor from Safra's deceased father Jacob E. Safra: "If you choose to sail upon the seas of banking, build your bank as you would your boat, with the strength to sail safely through any storm." Jacob's maxim has certainly helped Republic enjoy remarkable prosperity. But it may take more than sheer strength to carry Republic through a stormy decade of intense financial services battles.Suzanne Woolley in New York


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