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JAMES FLANIGAN

Smaller Could Be Better for Ailing B of A

September 30, 1986|JAMES FLANIGAN

You didn't hear anything about it, but the flurry of false rumors that disrupted BankAmerica Corp. a week and a half ago reflected a larger issue in American banking--the seriously weak state of a sizable number of banks large and small in the 14,000-bank U.S. system. Simply put, many banks are not making sufficient profits to offset increasing loan losses. And that means the banks face a reduction in their capital, which means, in turn, that they cannot increase their lending or their deposits because federal regulations--and simple prudence--dictate that a bank maintain its capital at a certain percentage of its loans. Bleakly put, that means that banking has become, for some at least, and temporarily, a no-growth business.

Why is this happening? Because banks are having difficulty competing in the new world of financial services. The automobile companies, for example, have been taking away the banks' car loan business by offering lower interest rates. Sure, the car companies subsidize interest rates. But so what? The auto makers, with tremendous capital reserves, can afford to give bargain loans in order to sell cars. Banks, meanwhile, don't have a big enough cushion to take losses in defense of their market.

New Competitors

And what General Motors has done on car loans, Sears, Roebuck and other retailers did a long time ago in consumer credit, and Goldman, Sachs and other investment bankers have done in commercial paper, which has replaced bank loans as the preferred source of finance for the biggest and richest corporations.

The banks are left with the Hobson's Choice of skinny profit margins on competitive business or higher risks on loans to oil drillers, farmers and real estate developers. The result is that any time the economy, or a sector of it, goes sour, banks are vulnerable to rumors and loss of the market's confidence.

Which is what happened the other week to B of A, when people evidently interested in profiting from a fall in BankAmerica stock spread rumors about its financial health. "You've heard of terrorism? Well, this was rumorism," says Morris A. Schapiro, 83, who has run M. A. Schapiro & Co., an investment banking house specializing in bank stocks, on Wall Street for 55 years. "Some of the dirtiest hands on Wall Street were looking for the quick buck," Schapiro goes on, "and it's a shame."

Reduce Its Vulnerability

The stock and options exchanges and the Securities and Exchange Commission are investigating the rumormongering. But meanwhile, what's a bank to do to reduce its vulnerability? Basically, it has two options: seek an infusion of capital from another bank or shrink its own business. The hoped-for effect of shrinking is that, with capital at a higher percentage of the shrunken assets, the bank can make new loans and start over as a growth business.

Bank of America, which at the end of this year's second quarter had equity capital of just under $4 billion and assets of $117 billion, has chosen to shrink. Right now, it is in the process of selling Banca d'Italia and other assets in Europe, hoping to add $500 million to capital with the proceeds.

Then, so that continued loan losses don't eat up that bounty, B of A aims to cut its expenses--by $259 million this year and $200 million next year--through personnel reductions and the closing of facilities that don't fit its new strategy.

According to a banking expert who is well informed on B of A, the bank doesn't look for operating earnings this year (although asset sales may produce cash earnings). But it hopes to break even on an operating basis by the end of March, 1987, and to be shipshape and profitable again by the end of next year.

It's a retreat, but a strategic one for Bank of America, the second-largest U.S. bank after Citicorp. Basically, B of A is pulling back from ambitions to serve all customers and markets nationwide and worldwide. Instead, it will focus what bankers call its retail business--taking deposits and making loans to borrowers large and small--on California and the West Coast. Elsewhere, it will become a wholesale bank, seeking to provide financial transaction services only to the largest multinational corporations. It is a strategy in marked contrast to that of Citicorp, which continues to expand into all markets everywhere.

Meanwhile, you can discount the talk about B of A merging with another bank, although in a business so vulnerable to rumor no bank could rule out the possibility of needing help at some time--and B of A doesn't.

Help from where? Banking experts think that if conditions worsen, industrial companies will be allowed--through a change in law--to acquire banks or that government will pump money in directly as it used to do.

Government didn't do a bad job either, helping troubled banks through the Reconstruction Finance Corp., which was set up in 1933 by outgoing President Herbert Hoover. RFC's first loan, as it happens, was to the legendary A. P. Giannini, who needed to meet withdrawals from his Bank of America. With that helping hand, Giannini built what was for a time the nation's largest bank.

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