Los Angeles will continue to be a feeding ground for big banks looking for acquisitions in 1998.
The regional economy is growing, real estate prices are on the rise and new businesses are starting up all creating fertile ground for both retail and business banks.
“Every major bank wants to be in California. If you want to be a national player you have to be there. That’s where demographics, population growth and economic growth lead you,” said Martin Freedman, analyst at Freedman Billings Ramsey & Co. in Richmond, Va.
If there is any slowdown in acquisition activity, it will likely be among the mid-sized banks, many of which are trying to digest the institutions they devoured in 1997. City National Bank, for example, cemented its position as L.A.’s largest independent bank through a series of mergers in 1997, and will likely spend much of 1998 reorganizing its operations.
Imperial Bancorp, another local leader and favorite of banking analysts across the nation, appears more preoccupied with spinning off some of its specialty businesses than acquiring new ones at this time.
Smaller banks and thrifts, meanwhile, are expected to continue consolidating at a furious pace. With bank share prices at such high levels, there is no better time to sell. At the same time, acquirers can use the strength of their equity to finance acquisitions more easily.
If there is any threat to the local banking scene, it is the steady downward march of interest rates. Long-term yields are now below 6 percent, down from around 7 percent 18 months ago. With each downward adjustment in interest rates, the profit margins of banks narrow. At the same time, lower interest rates are prompting homeowners to refinance their existing mortgages at lower cost.
While the rate squeeze is affecting all U.S. financial institutions, the pain might be most acutely felt in Los Angeles, where stock prices of banks and thrifts are hovering at record-high multiples.
On the positive side are indications that the goodwill litigation filed against the government by thrifts may come to a conclusion this spring, with S & Ls; on the winning side. The thrifts are arguing that changes made to accounting laws by the government hurt their industry.
While much of the good news is already reflected in their stock prices, L.A.-based thrifts such as Glendale Federal Bank, H.F. Ahmanson & Co. and California Federal Bank could receive a shot of adrenaline should a final ruling in their favor be handed down.
A question mark will linger over L.A.’s Asian banks through 1998. Many, such as Sanwa Bank California, East-West Bank and Tokai Bank of California are owned by Asian companies. The expectation is that at least one Asian bank in the city will be sold off as the economic crisis across the Pacific deepens.