For years the investment community has been waiting for the rush on California banking assets. A haven of large one-state institutions that collectively control $619 billion, or 13% of the nation's banking assets, California provides a number of golden opportunities for banks looking to go coast-to-coast. But until recently, concerns about the state's lagging economy and the quality of its assets have outweighed the positives and kept bidders at bay.
That may be changing. With First Bank System and Wells Fargo & Co. bidding to pay top dollar for the franchise of Los Angeles-based First Interstate Bancorp, investors are starting to eye a small group of the state's large thrifts as the next likely battleground. "With First Interstate in play, there really is a scarcity of [commercial banking] assets in California," says Keefe, Bruyette & Woods Inc. analyst Thomas F. Theurkauf Jr. "What remains are the thrifts."
BACK IN LINE. The savings and loans, which control 42% of banking assets in the state, have greatly improved returns in the last two years. Nationally, thrifts may get a boost from changes outlined in the Balanced Budget Act of 1995. By rebuilding the anemic fund that backs thrift deposits, Congress would bring the premiums thrifts pay for their insurance back in line with the much lower premiums paid by banks.
Some players have already made their moves. In August, First Nationwide Bank, Ronald O. Perelman's joint venture with Texas banker Gerald J. Ford, anted up $250 million in cash for San Francisco Federal Savings & Loan Assn. Other California S&Ls likely to be targeted include Great Western, H.F. Ahmanson, Golden West Financial, Coast Federal, and Glendale Federal. Buyers could include such out-of-state institutions as NationsBank, Banc One, Norwest, KeyCorp, and Washington Mutual.
Analysts regard Great Western Financial Corp. as especially alluring. One of the market's healthiest thrifts, Great Western has become more banklike: Fee-generating transactions make up 42% of the company's total deposits, compared with 28% at rival Home Savings of America, the state's largest thrift, with $50 billion in assets.
One big fan is Lord, Abbett & Co. partner E. Wayne Nordberg, a New York money manager who holds close to 4% of Great Western's stock. Nordberg argues that banks' overcapitalization will force them to look for acquisitions to maintain strong returns. Big operators, he says, offer the best potential returns.
For banks that prefer to buy with stock, the timing seems propitious. Bank stocks have enjoyed a great run this year, rising 40%. At the going rate, Sanford C. Bernstein & Co. analyst Jonathan E. Gray thinks a bank could pay a premium of as much as 32% for Great Western and 54% for Ahmanson.
Not everyone is so sure California's thrift merger-and-acquisition market is about to catch fire. Ahmanson CEO Charles R. Rinehart won't comment on his own company, but says that in general, increased interest in the state's thrifts over the past six months is "mostly at the investment banker level and a lot less in actual dealmaking."
Part of what's standing in the way is pricing, according to James Marks, an analyst with Hancock Institutional Equity Services. He says there's a significant discrepancy between what potential buyers are willing to pay and what thrifts are asking. According to SNL Securities, the state's average price-to-book ratio is 56% below the national average. But Marks expects California pricing to firm up as buyers become more confident about asset quality and the thrifts' improving financial performance.
And sellers may be willing to cut their prices, as thrifts, which traditionally specialized in low-margin businesses such as first mortgages, increasingly compete directly with more profitable banks and nonbank rivals. "The managements of these companies realize full well that unless they can generate a competitive 15% return on assets, their futures are in question," says Marks. That may explain why Stephen J. Trafton, CEO of Glendale Federal Bank, is "indifferent" to staying independent. For the right price, Trafton says, he would sell to maximize shareholder value. As competition tightens, more thrift CEOs may be seeing things his way.
Handicapping the Thrift Buyouts
Great Western Financial
Golden West Financial
(World Savings & Loan)
Coast Federal Bank
Glendale Federal Bank
...AND LIKELY TARGETERS