A chastened BankAmerica makes slow, sure comeback

No one believed it could be done, but it appears that BankAmerica Corporation, the troubled San Francisco-based financial giant, is slowly but surely coming back. It's not out of the woods yet, but the beleaguered bank is showing the strongest signs of advancement ever, since that momentous day in September 1986 when the bank was rumored to be on the verge of collapse.

The progress in 1988 has been solid. After losing close to a billion dollars last year, Bank of America (also known as B of A) is expected to end the year with a sharp improvement in earnings. For the first year since 1984, the bank will show a profit. This follows eight consecutive quarters of improvement in operating results, including five that have been in the black.

Indeed, there is a bullish wind adrift these days about the bank's prospects.

``I was a bear for a long time on B of A,'' says Michael Abrahams, senior bank analyst at Bateman Eichler, Hill Richards Inc. in Los Angeles. ``Now I'm a bull.'' Not that there aren't risks, he adds, but he says the new management team has done quite a job at turning the bank around.

Wall Street apparently agrees - the stock has moved steadily upward throughout 1988 and is expected to triple by year's end. It has gone from 6 in January, reflecting its post-plunge valuation, to 18 in October. ``If nothing blows up south of the border, the stock could be in the low to mid-20s by the end of the year,'' Mr. Abrahams says. ``For people who can take the risk, that's really cheap.''

Analysts are basing their optimistic 1988 forecast on the expectation that the bank will recognize $300 million in back interest from Brazil in the fourth quarter. Recognition of these payments resulting from the September debt accord could balloon earnings per share to an estimated $2.90, from 97 cents in the third - and give the bank a good boost for the year.

But some analysts note that the recovery would not seem so large without income tax credits the bank received from prior losses. Without a $45 million tax credit, they say, BankAmerica's return on each dollar assets would have been just 0.6 percent because of high costs and nonperforming assets. This contrasts with a 1.16 percent for its California competitor, Wells Fargo & Co.

Still, it is an amazing comeback story in banking history that a bank that fell as far as BankAmerica did could spring back so fast. Barring a recession or a major default by the less-developed countries, all signs point to continued progress in the next year. Major achievements have been made in reducing loan losses, trimming overhead expenses, and improving operational efficiencies.

A key part of the turnaround strategy has been to concentrate narrowly on traditional California markets rather than continuing to develop a grand global strategy. Offices in places like Abu Dhabi, United Arab Emirates; Asunci'on, Paraguay; La Paz, Bolivia; and Nairobi, Kenya, are gone, as the bank has rediscovered California.

``They're refocusing on areas where they feel they have real strengths,'' says Abrahams, ``instead of trying to be all things to all people.''

BankAmerica, many say, was a victim of its own grandiose vision of global empire and the drive to become the largest bank in the world. But rapid, uncontrolled growth took its toll on internal systems and operations. By 1986, the bank was widely viewed as the basket case of the financial world, having lost major market share to aggressive California super-regionals like Wells Fargo Bank and First Interstate Bank.

Even today, Bank of America has not regained the market share it lost in the California middle market - now 28 percent versus 38 percent a decade ago. ``But they appear to have stabilized their California market share,'' says Lawrence Cohn, a bank analyst at Drexel Burnham Lambert Group in New York. ``They've stopped the erosion - and that's a major achievement.''

Also, B of A, which once held 39 percent of the consumer deposit base in California, lost a full 10 percentage points of market share over the past decade. But even with this erosion, it still holds the dominant position in California. ``The deposit base has always been the great strength of this bank,'' says James Rosenberg, vice-president of Equity Research at Shearson Lehman Hutton Inc. in New York. ``That's what held the bank together during this difficult period.''

A key achievement for the bank has been the reduction of domestic loan losses. After shooting to record highs in 1986, nonperforming loans in relation to total loans have been steadily declining ever since. At the end of 1986, the ratio was a steep 5 percent, while in mid-1988 it was down to 3.6 percent.

``That's still among the highest in the industry,'' notes Abrahams. But the improvement follows a massive overhaul of the bank's credit administration system, which put in place stricter monitoring and control policies.

Through a series of often painful cost-cutting measures, the bank has managed to pull down its administrative overhead. Progress hasn't been so spectacular in 1988, but the closing of 250 California branches and reductions in employment ranks since 1986 have made it cheaper for the bank to produce a dollar of revenue.

Ironically, the managers hired from archrival Wells Fargo get more credit for the turnaround from many analysts than does A.W. Clausen, its chairman. ``Their role has been critical,'' says Abrahams. ``B of A almost lost focus on the California market. The Wells Fargo team brought back that focus.''

Some view the decision to bring back Mr. Clausen, who was president from 1970 to 1981, until he became president of the World Bank, as an odd one. ``Some would argue that it was his policies that led to the bank's problems,'' said a New York bank analyst who asked not to be identified. ``But he was a recognized banker with a capital `B,' and added an element of authority to a confused situation.''

Not everyone is confident about the bank's condition. ``The bank still has a very substantial amount of troubled assets on the books,'' says Mr. Cohn at Drexel. ``It is potentially at risk if a recession should hit the United States in the immediate future.''

The less-developed countries (LDCs) debt issue still looms ominously over the bank's horizon. At $9.1 billion in loans to these countries, it's one of the largest figures among the nation's banks. ``B of A would be impacted much more by a blowup south of the border than most California banks,'' says Mr. Rosenberg.

``The LDC debt problem is what scares me,'' says Abrahams. ``If populist pressures in Mexico and Brazil get really strong, there's a real danger of a debt moratorium. The question is how much the bank could withstand.''

The other issue of concern is the bank's capital reserves. At 3 percent, it's close to the level of many money-center banks, but far thinner than the 7 percent average of the California super-regionals. B of A is not expected to have difficulty meeting the 1992 regulatory standards for capital (8 percent of risk-adjusted assets), but whether it could withstand an LDC default or some extraordinary economic event is, of course, the million-dollar question.

Some analysts caution against jumping on the BankAmerica bandwagon - especially given falling energy prices. The sharp rise in the stock price may be premature. ``The stock is really ahead of itself,'' says Cohn. ``The quality of the earnings they've reported is low. It's not grossly overpriced, but it's fully priced.''

Nevertheless, it's clear the bank is back in business. A sharper, smarter management team across the board is considered one of its best assets. ``They inherited a company that was really in serious trouble,'' notes Cohn, ``and they still have a long way to go. But they've made progress. They've made a good start.''