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VIEWPOINTS : What BankAmerica Can Do to Reverse Its Dangerous Course

July 27, 1986|ROBERT P. SHAY | Robert P. Shay is professor of banking and finance at Columbia University's Graduate School of Business. He is the co-author with Colin Lawrence of "Technological Innovation, Regulation and the Monetary Economy," published by Ballenger Press.

BankAmerica, on the heels of a shocking $640-million second-quarter loss, faces possibly the most difficult period in its 82-year history.

The loss, due largely to continuing problems with foreign, real estate, energy and farm loans at the company's Bank of America unit, was the second largest in banking history and was unexpected, given that many analysts had thought the worst of the bank's problems were over.

Now, BankAmerica faces a number of wrenching decisions. Should it sell assets and shrink? Should it undertake further cuts in personnel, which could save money but harm customer service? Should it raise new capital, and how? Should it change or restructure top management?

Meanwhile, the company must contend with possible takeover attempts while trying to maintain depositor confidence as observers wonder whether further losses are still ahead.

In an attempt to explore the various options facing BankAmerica, The Times invited bank consultants, investment analysts, academicians and investors to comment on what they think the bank's management should do to turn the company around. Here are their comments:

BankAmerica, on the heels of a shocking $640-million second-quarter loss, faces possibly the most difficult period in its 82-year history.

The loss, due largely to continuing problems with foreign, real estate, energy and farm loans at the company's Bank of America unit, was the second largest in banking history and was unexpected, given that many analysts had thought the worst of the bank's problems were over.

Now, BankAmerica faces a number of wrenching decisions. Should it sell assets and shrink? Should it undertake further cuts in personnel, which could save money but harm customer service? Should it raise new capital, and how? Should it change or restructure top management?

Meanwhile, the company must contend with possible takeover attempts while trying to maintain depositor confidence as observers wonder whether further losses are still ahead.

In an attempt to explore the various options facing BankAmerica, The Times invited bank consultants, investment analysts, academicians and investors to comment on what they think the bank's management should do to turn the company around. Here are their comments:

The diagnosis of Bank of America's ills is easy--too many non-performing loans due to recession in the Western United States, troubles overseas and the gyration of oil and energy prices. The bank's problems mirror those of the United States and the world--it is caught in a web of problems that it did not anticipate.

One thing is clear: The bank did not move quickly or dexterously to minimize its losses. Management problems compounded Bank of America's difficulties, and although much has been done over the past five years to improve management, results remain elusive.

The bank has taken many steps to bolster its position--including the acquisition of Seafirst--that may help it eventually but not immediately. In the long term, Seafirst will improve the bank's position in interstate banking, especially in the Northwest. In the short run, the Bank of America acquired a basket of problem energy loans, where performance has undoubtedly deteriorated.

The question is whether the bank is expert enough to work out the problems, or whether it should sell them to someone who can. I believe that it should deal with most of those loans but sell those they can dispose of at reasonable prices in order to limit the pressure on the bank's staff. That involves continuing to take losses, running the risk of creating more uncertainty about Bank of America's future and spurring capital flight.

Nevertheless, the losses, like those recently announced, would be an indication that the bank has decided to take its bitter medicine and is moving back toward greater financial health.

It will not attempt to grow out of its problems and will retrench in some areas. Shrinking, however, has its own problems. The future is with larger banks, and you don't want to drop back to a size that would make you uncompetitive with other regional or national banks. The streamlining must reduce B of A's size, but only by perhaps 10% to 15%.

With its extensive network of branches in California and around the world, the bank is well positioned to deliver retail banking services such as consumer and small business loans. With loan office in other states as well, the bank is also well positioned to deliver banking services in the interstate market. With a foothold in the growing Pacific Basin market and with branches around the world, they are in the forefront of international banking.

These are areas in which the bank is strong and on which it should concentrate.

Has management had enough time to reverse its problems? It is a difficult question to answer. From where I sit, Bank of America needs and probably deserves more time to cope with its problems.

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