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Banking on It : Great Western Strives to Overcome Its Thrift Restrictions


Great Western Financial Corp.'s new chief executive, John F. Maher, has a dilemma.

The Chatsworth-based parent of Great Western Bank, the nation's second-largest savings and loan with $45 billion in assets, managed to survive the thrift industry crisis of the 1980s and the California recession of the 1990s, and now is looking to have a good year. It has successfully diversified into banking services and rebuilt its profit. Its problem loan portfolio is under control, and costs have been slashed.

Problem is, no matter how hard Great Western works at becoming more bank-like, it's still a thrift, and it will stay one until Congress decides otherwise. That means it remains confined to certain lines of relatively unprofitable businesses that will keep its profit rather dismal compared with real banking companies such as BankAmerica Corp. and Wells Fargo & Co.

Great Western's return on equity, a common industry measure of profitability, was only 10% last year, compared with more than 20% for big banks such as Wells Fargo and First Interstate Bancorp.

Maher is aiming for a 15% return on equity, but some analysts say that goal may be unreachable as long as Great Western is a thrift.

The long-term outlook for the industry "is bad, it's dismal," said Campbell Chaney at Rodman & Renshaw in San Francisco. "The thrifts are slowly going out of business as an industry. That's why you're seeing Great Western transform into a bank."

However, that change can only go so far as long as Great Western remains hamstrung by the thrift charter, which requires it, for instance, to keep 60% of its assets in home mortgage loans. Congress has tabled the issue for now, but most observers expect eventually a single charter for banks and thrifts.

Meanwhile, though, "Investors aren't going to tolerate mediocre investment returns, or profitability," Chaney said. "They will force thrifts into the arms of others, if necessary."

The banking industry is already undergoing a consolidation. First Interstate just agreed to be gobbled up by Wells Fargo. But few big California banks are left for the taking. So a thrift such as Great Western, with its large California market share, is considered a prime takeover target for out-of-state banks such as First Bank System Inc. of Minneapolis--the losing bidder for First Interstate--or NationsBank Corp. of Charlotte, N.C. Some observers expect a suitor to emerge this year.

Great Western isn't the only California thrift struggling to break free of its savings and loan fetters, and it's certainly not the only one thought to be a likely takeover candidate. For instance, Glendale Federal Bank recently waved a flag to potential buyers by saying the best future for it would be for it to be acquired by a bank.

Maher, 52, isn't making any similar pronouncements. But he doesn't discount the possibility that Great Western might soon entertain a takeover bid.

"My job," he said, "is certainly not to create an ugly duckling."

Formerly chief operating officer, Maher took the reins from longtime chief James F. Montgomery on Jan. 2. Montgomery, 61, remains chairman and will concentrate on lobbying issues.

It was Maher--a savvy, straight-talking former investment banker--who engineered the move into banking services. Although not unique, Great Western was among the first and has remained one of the most aggressive thrifts with that strategy.

Savings and loans take in depositors' money in certificate of deposit accounts, then use the money to make residential mortgage loans. It's a low profit-margin business that's highly sensitive to economic swings.

So Great Western pushed into fee-based businesses, such as checking accounts--banks' bread and butter. It began offering consumer loans, credit cards and mutual funds. It built a mortgage business outside California.

"We're not going to compete with Wells Fargo or Bank of America, and syndicate a loan to Brazil or to General Motors," Maher said. "But we have the distribution system, and we have the account relationships with our retail customers. If we just do a better job at serving a broader array of their needs, we will automatically become more bank-like."

Analysts say Great Western is doing a good job so far, given its limitations.

"The past couple of years, every thrift in the state has been trying to collect more transaction accounts. But Great Western still leads the pack in that," said James M. Marks, an analyst at Hancock Institutional Equity Services in San Francisco. "They've found themselves in a place that a lot of other thrifts in the state want to be."

The situation was rockier just a few years ago. In the early '90s, Great Western boosted its reserves to pay for loan losses, a reflection of California's sickly real estate market, and profit plummeted.

By 1994, Great Western's profit rebounded to $251 million, from $62 million in 1993. Last month, the company reported a 1995 profit of $261 million.

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