California 1st Gets Growth by Nurturing Ties to Japan

Seishichi Itoh, president and chief executive of California First Bank, is a man who knows his history.

“The Bank of America started out as the Bank of Italy,” said Itoh, a 51-year-old Japanese national who heads the sixth-largest bank in California.

“Well, we used to be known as the Bank of Tokyo,” he continued, letting his listener draw his own conclusions.

With 135 branches and $6 billion in assets, California First is not ever likely to challenge Bank of America, whose 900 offices blanket the state.

But, as the largest Japanese-owned bank in the United States, California First cannot be ignored, either.

Boasts Relationships

Boasting business relationships with 80% of the 900 Japanese firms that do business in California, the 77%-owned unit of the Bank of Tokyo finances trade, facilitates acquisitions and invests pension funds for such clients as Fujitsu, Nissan and Mitsubishi Metals.

“As a retail bank, California First is boring. I just don’t feel them in the marketplace,” said J. Richard Fredericks, banking industry analyst with Montgomery Securities in San Francisco.

But as a channel for the torrents of money that flow between California and Japan, California First is increasingly making its presence felt.

When Mitsubishi Metals sought financial advice in connection with its $32-million acquisition of Siltec, a Menlo Park, Calif., maker of silicon wafers, it turned to California First.

And when Sunkist Growers needed financing last year to penetrate markets in Southeast Asia, California First placed $20 million in bonds with European investors.

Shimano American, an importer of bicycle components from Japan, picked California First to finance its new office and warehouse complex in Irvine last year,

“They provided a very competitive interest rate,” said Yoshizo Shimano, president of the company, which does about $120 million in U.S. sales annually. “We also like the fact that we’re dealing with what is essentially a local bank that knows the local market. They have very good information.”

“California First is a very reliable bank in every respect,” added Capt. Shinta Asami, president of International Transportation Services Inc. of Long Beach.

The firm, which operates a container terminal for ships carrying goods from overseas, leases cranes and other equipment from California First.

“Without them, we wouldn’t be in business,” Asami said.

California First has such a large share of Japanese business here because of its heritage. Unlike other Japanese banks in California, such as Mitsubishi and Sumitomo, California First and its parent, Bank of Tokyo, are not parts of a zaibatsu , the industrial-financial conglomerates that control large chunks of Japanese business and industry.

“Our Japanese customers are more comfortable with us because we do not belong to any zaibatsu,” Itoh explained.

Moreover, Bank of Tokyo, whose roots in California date back to the 19th Century, is the acknowledged leader among Japanese banks that do business abroad and is known as “the Chase Manhattan Bank of Japan” for its role in financing foreign trade.

Helps in Relocating

Bank of Tokyo’s assets in the United States total $25 billion; they include the assets of California First, a New York unit, other affiliates and loans made by Bank of Tokyo offices around the country.

But California First does more than provide advice and financing for Japanese companies here. In many cases, the bank’s services are decidedly personal.

“If a Japanese company is setting up shop in the U.S., we will help the executives find a home, and a school for their children,” Itoh said. And if U.S. customers post executives in Japan or other Pacific Rim nations, California First arranges for similar services overseas.

Still, despite its knack for attracting Japanese business customers, California First’s financial results have been unspectacular.

It earned 57 cents on every $100 in assets in 1986, up from 51 cents the year before but well below the California industry average of 76 cents.

California First’s return on equity, another key measure of profitability, was 10.19% last year. On the other hand, all Japanese banks have notoriously low earnings, in part because of the way earnings are calculated in Japan, so the California performance may not look so bad to Bank of Tokyo.

Net income in 1986 was $30.7 million, or $2.61 a share, up 20% from $25.6 million, or $2.26 a share, a year earlier.

Such far-from-stellar results have led some observers to conclude that California First and other Japanese bankers are “buying” market share by shaving loan rates and bidding up rates on deposits.

Stress Long-Term View

“I don’t think any of the Japanese-owned banks in the U.S. have done tremendously well,” said Edward Young, a banking industry analyst for Moody’s Investment Service in New York.

Perhaps it is because Japanese enterprises emphasize long-term performance over short-term results. But Itoh replies: “We are as profit-oriented as anybody else.

“Our stock is listed on the NASDAQ (list of over-the-counter stocks), and we have minority shareholders to answer to. If I do not produce good results, I am sure I will be gone.”

Actually, high loan losses and non-interest expenses are what have hurt California First. Last year, the company revamped its credit procedures and shaved 62 employees from its payroll of 4,000, mostly through attrition.

Further employee cutbacks are expected this year through automation and consolidation of various clerical operations.

Still, California First is seeking to expand its retail branch network. “We feel we need another 50 or 60 branches to cover the state effectively,” said James R. Gibson, executive vice president in charge of retail operations.

Such a network, he thinks, would provide economies of scale. Meanwhile, California First is banking on such innovations as a computerized telephone inquiry service for customers and automated teller machines at Safeway Stores to stay competitive.

California First’s retail stronghold is in San Diego; there, the bank’s share of the retail banking market is second only to Bank of America.

The San Diego presence resulted from Bank of Tokyo of California’s 1975 merger with Southern California First National Bank of San Diego, a marriage that resulted in California First.

Demand Higher Prices

Itoh agrees on the need to expand the retail branch network but frets about the cost of acquisitions. He suspects that sellers of banks boost their asking prices when the dollar-laden Japanese come calling.

“There is a two-tier pricing system for banks in the U.S.,” he said, “one for American investors and one for Japanese.” Privately, some U.S. investment bankers agree.

But valuations for large branch networks in California are likely to rise sharply in 1991, when out-of-state banks win the right to do business in California.

Some analysts suggest that California First may bide its time until then and sell off the retail branch network, retaining its commercial and trade-related operations.

“We are not for sale,” said California First spokesman Larry Boggs. “At the same time, I think the Bank of Tokyo would agree that everything has its price.”