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As Battle Ends, 2 Banks Confront Major Hurdles : First Interstate's Failure Focuses Attention on Its Own Appeal as a Target

February 10, 1987|BILL SING | Times Staff Writer

First Interstate Bancorp's withdrawal of its bid to acquire BankAmerica will not deter its longtime expansion strategy of acquiring other banks in California and nationwide, analysts and company officials said Monday.

But First Interstate's failure to acquire BankAmerica again focuses attention on its own vulnerability to a takeover, some observers said. First Interstate Chairman Joseph J. Pinola is known to have hoped to acquire BankAmerica in part to shield his own institution, whose 12-state banking operations are seen as attractive to potential suitors who could afford the multibillion dollar price.

"First Interstate is probably the No. 1 target for a large bank penetration into the Western U.S.," said Jerry Findley, editor of the Findley Report, a Brea-based banking newsletter.

Meanwhile, First Interstate must improve its own earnings performance, which, while far better than BankAmerica's, has been "mildly disappointing" of late, some analysts said.

While First Interstate's banks in such states as Nevada, Arizona and Oregon are stellar performers, others--Colorado and Alaska, for example--are suffering from slumps in the energy and farming sectors.

'Not a Top Performer'

Meanwhile, First Interstate's effort to franchise its name with banks in other states has not been highly profitable and has stalled in recent months, in part because of the troubles of Farm Belt banks, where much of the expansion of the franchise effort is now focused.

Some analysts also are concerned that First Interstate's earnings and market share growth have not kept pace with those of its other major California competitors, Wells Fargo and Security Pacific, and its expenses are not as low.

"In many areas, (First Interstate is) not a top performer," one Los Angeles investment banker said.

But the ending of the BankAmerica bid could provide benefits. "Now that's behind them . . . they can get back to running their bank," said Dan Williams, a banking analyst at Sutro & Co. in San Francisco.

And First Interstate, while showing disappointing flat earnings in the fourth quarter of 1986, still performed close to Wells Fargo and Security Pacific for the full year, said Richard Fredericks, banking analyst at Montgomery Securities in San Francisco. He noted that First Interstate's return on assets was 0.68% last year compared to 0.71% for Security Pacific and 0.73% for Wells Fargo.

Withdrawal of the BankAmerica bid will also allow First Interstate to look for other takeover targets, possibly among smaller banks in California, where its flagship bank, First Interstate Bank of California, has largely failed to gain market share in recent years. First Interstate's strategy of seeking "acquisitions and franchises to expand the scope of our territory" has not changed with the end of the BankAmerica bid, First Interstate spokesman Paul Minch said.

Such acquisitions could also make the firm and its network of 23 banks in 12 states less vulnerable to a takeover.

Pinola has said that the banking industry of the future will be dominated by a few giant banks and that those that do not swallow others may themselves be swallowed. Pinola also has said that major out-of-state banks are likely to enter California eventually.

Barred Until 1991

However, any bid for First Interstate by an out-of-state American bank could not happen until 1991, when state law allows outside banks to purchase California banks. However, that does not rule out a purchase now by a foreign bank.

Some Japanese banks, such as Dai-Ichi Kangyo, Industrial Bank of Japan or Fuji Bank, could be interested, consultant Findley said, noting that Dai-Ichi, the world's largest bank, had been rumored to be interested in BankAmerica.

These Japanese banks "don't have a strong presence in the California market or the U.S. market," he said. "They are stirring around and would like to be invited to the party."

Regulatory Barriers

However, a foreign takeover could face regulatory barriers, as the Federal Reserve may not favor the foreign purchase of such a large American institution, some analysts say.

The value of First Interstate's stock on the open market is about $2.6 billion, ruling out nearly every U.S. bank except such giants as Citicorp, Morgan Guaranty and Bankers Trust.

All three are prohibited by law until 1991, and Morgan and Bankers Trust are known to be not interested, analyst Fredericks said.

Thus, a takeover "is just not an issue," he added.

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