BENJAMIN MARK COLE
The big word in L.A.’s banking and finance community is consolidation, driven by market competition and the need for efficiency as well as shareholder demands for profit and share price appreciation.
Never before have bank and thrift executives faced such ferocious pressures for strong performance, industry officials say, leading many to conclude that survival can only be had by becoming more efficient and big enough to fend off others.
“In general, there is growing competitive pressure for performance and efficiency, not just in banking but in every industry,” said Russell Goldsmith, chairman and chief executive of Beverly Hills-based City National Bank.
“We are no different.”
Even large thrifts that do not merge and become larger will be “sitting ducks” for takeover by out-of-staters, said Charles Rinehart, chairman of Irwindale-based H.F. Ahmanson & Co., in explaining his recent bid to take over Chatsworth-based Great Western Financial Corp.
Already, due to consolidation, there are no major banks left with headquarters in Los Angeles an unthinkable situation 15 years ago, when such giants as First Interstate, Security Pacific, Crocker Bank and others dominated the downtown skyline.
Whether willingly or not, it is the thrifts that are on the auction block now. One big name recently acquired the deal became effective in January is California Federal Bank, having been bought by First Nationwide Holdings Inc.
A takeover tussle is underway, as H.F Ahmanson (Home Savings) competes with Seattle-based Washington Mutual Inc. to triumph as the winning bidder for Great Western.
The emergence of institutional shareholders has had a telling effect on the operations and strategic plans of bank and thrift officials.
Just a sampling of the power of institutional shareholders: They own more than 80 percent of H.F. Ahmanson; more than 80 percent of Great Western: more than 80 percent of Glendale Federal; nearly 75 percent of Coast Savings Financial; and almost 57 percent of Santa Monica-based FirstFed Financial Corp.
In days of yore, shareholder meetings often featured individual shareholders who expressed loyalty to management, and enjoyed being recognized by management.
Today it is management usually incentivized by stock options and the like that seeks to be recognized by institutional shareholders.
Officials from H.F. Ahmanson, Great Western and Seattle-based Washington Mutual Inc. are traipsing the country, trying to persuade institutional shareholders of the relative merits of their proposals.
“I’ve got some meetings scheduled with officials from Ahmanson and Great Western. They call us, and asked to meet…Yes, if you go back 15 years, there has been a tremendous increase in shareholder influence,” said Mike Baxter, managing director at Los Angeles-based money manager Hotchkis & Wiley, a $10.6 billion shop with big stakes in both H.F. Ahmanson and Great Western.
Perhaps understandably, City National Corp., parent of the $4 billion-in-assets City National Bank, three weeks ago added a takeover poison pill to its corporate by-laws, which would effectively dilute the stock holdings of any investor who bought more than a 10 perent stake in the company.
Every bank or thrift chieftain, aside perhaps from those sitting atop $100 billion in assets or more, knows that consolidation is a daily possibility perhaps in the form of an unwanted marriage proposal from another financial institution.
If pressures from shareholders weren’t enough, then there are market pressures from larger competitors merged banks and thrifts can offer more locations, and have bigger advertising budgets than smaller financial companies.
“In the past, there were just an awful lot of providors of financial services. That set up a situation where you could get cost savings through mergers and acquisitions,” said Kathleen Wediking, senior vice president at the Western League of Savings Institutions.
And new labor-saving and service-providing technologies, particularly involving computers, are available. Networked automated teller machines (ATMs) are one example, said Wediking.
“The more customers you have, the more you can spread the cost of new technology around,” said Wediking.
The consolidation wave is far from over, said Wediking.
“It has been going on for a long time. I think it will go on for another long time,” she said.
The effect of consolidation on the Los Angeles job market has been to reverse a historical trend of local job growth in financial services.
In most of the postwar era, the number of jobs in Los Angeles County counted in the “FIRE” category finance, insurance and real estate had been growing, said Jack Kyser, economist with the Los Angeles County Economic Development Corp.
Now, the number of local FIRE jobs is shrinking.
“You have to say that this is a sector with a lot of very drastic changes,” said Kyser.
Countywide, the workforce in the FIRE category hit a peak in 1990 of 278,000, and by most recent counts, is down to 217,000. It will further erode to under 200,000 in the next couple of years, Kyser estimated.
But there will probably always be a variety of banks and thrifts in Southern California, said Goldsmith of City National Bank.
“I don’t think it will reach the point where you have just one or two banks. This is such a huge and robust market. But the economic forces driving consolidation are continual, and it is hard to say when the consolidation wave will stop.”