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VIEWPOINTS : What BankAmerica Can Do to Reverse Its Dangerous Course

July 27, 1986|DAVID C. CATES | David C. Cates is president of Cates Consulting Analysts, which consults with banks on corporate strategy, financial planning mergers and investor relations. He also is a member of the New York Society of Security Analysts, the Bank and Financial Analysts Assn. and the Bank Industry Subcommittee of the Financial Federation

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:

There are three alternatives that BankAmerica's board of directors should examine in order to discharge its legal responsibility toward depositors and shareholders.

One alternative--the least drastic but most risky--is to take responsibility for maintaining the independence of BankAmerica as a stockholder-owned entity. This means ratifying or changing management as needed to restore the bank to healthful profitability. The risk is that this end may not be clearly attainable within, say, three years.

The second choice is to seek an acquirer, perhaps with federal assistance, to revive this enormous and delicate giant. The risk here is that this may be too vast a task for another set of shareholders to undertake.

The third alternative--scary and distasteful but altogether plausible--is to seek some form of federal trusteeship. Under this scheme, similar to the federal rescue of Continental Illinois, the bank would be capitalized and "remanaged" (with new directors and top management) until it can be returned to full private ownership. The risk is that this step, for the second time in just a few years, raises the specter of nationalization of weak large banks. It is, in any case, a blow to the notion of a privately owned banking industry.

The key to this riddle is loan losses. All of the other problems at BankAmerica--high operating expenses and narrowing margins--are amendable to drastic management steps that the BankAmerica board could require. But if the loan-loss hemorrhage cannot be staunched soon, the bank's capital will become so impaired as to frighten the rather wide world of BankAmerica customers, including uninsured funds providers. They then may lose that minimum degree of confidence that they need to continue supporting the bank.

Continued heavy losses may even discourage First Interstate--and other possible suitors--from their interest. A further argument against acquisition is that the BankAmerica giant makes any West Coast suitor look like Jack: even a federal beanstalk cannot overcome the inequality of size and complexity. As for an East Coast acquirer, Citicorp is perhaps the only bank that could manage the purchase of BankAmerica.

Does such a step, however, fit the Citicorp strategy? I doubt it, but such a takeover makes more sense than one by First Interstate.

The troubling news is that even after the enormous second-quarter loss, non-performing loans are higher than ever. One bright spot, however, is the so-called cash yield from non-performing loans. During 1985, this yield was almost 5%, somewhat above the average of other large banks. This suggests that the backlog of future losses is not as great as if the cash yield was much less--say 2%.

The BankAmerica board can perform an important service to its stockholders and to the public by its realistic anticipation of future events and by taking the correct action, however drastic. To avoid facing these choices is to risk being overtaken by events, with its potential for crisis and disruption that could disturb other banks as well.

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