A SPECIAL REPORT ON THE SOUTHERN CALIFORNIA ECONOMY : THE FINANCIAL CAPITAL OF THE WEST : Growth in Trade, Population Signal a Rosy Future for Southland Banking

As American banking generally struggles with a storm of bad news--including the highest number of bank failures since the Depression, Southern California’s financial community is seen by many as an oasis. With few exceptions, the position of banks here is viewed with envy by their counterparts across the country.

That also includes the banking cousins in Northern California, who have been forced to acknowledge that Los Angeles has now surpassed San Francisco as the financial center of the West.

That dominance is expected to increase in coming years, as increasing amounts of trade with the Pacific Basin and continued population growth push the Los Angeles area further ahead of its Bay Area rival.

“Los Angeles has clearly emerged as the leading financial center of the West,” said Mark E. Buchman, immediate past president of the California Bankers Assn. and executive vice president of Los Angeles-based Union Bank, the state’s fifth largest.

James F. Wilson, an analyst with the San Francisco brokerage firm Sutro & Co., concurred: “The securities business is still concentrated in San Francisco, but it makes more sense for banks--and foreign banks in particular--to locate down in Los Angeles because of the population and the business (growth).”

Buchman expects Los Angeles’ dominance to continue in the coming years: “I foresee, by the end of the century, four great financial centers in the world--New York, London, Tokyo and Los Angeles. Why Los Angeles? Because of the impressive population growth in the West and its position as the linchpin for trade in the Pacific Basin and Asia. I don’t think we’ll knock out New York as the nation’s financial capital, but who cares? We’ve got plenty to do out here.”

That new position as financial capital of the West has brought foreign banks to Los Angeles in droves--an estimated 140 to 150 foreign banks have operations here, making Los Angeles second only to New York in the number of foreign bank branches and subsidiaries.

Twelve of the 25 largest banks in California are foreign-owned. According to figures from the California superintendent of banking, at the end of 1986, these 12 foreign-owned banks had a total of $50.7 billion, or 19.7%, of the $257.2 billion in assets held by the 25 largest banks in the state. The $257.2-billion figure, in turn, represented 88% of the total assets of all commercial banks in the state.

The position of Los Angeles as gateway to the Pacific Basin and the increasing number of foreign businesses operating here are part of what makes Southern California particularly attractive to foreign financial institutions. They also like the fact that Southern California contains nearly two-thirds of the consumer deposits in the nation’s most populous state.

Those same factors have been noted by the major East Coast banks and the highly profitable regional banks elsewhere in the country. They are studying the California market carefully in preparation for 1991, when the state opens its doors to full interstate banking. It is then that banks from outside the West will be able to establish new offices here and acquire existing California institutions.

That will put new competitive pressure on California’s big home-grown banks--Bank of America, Security Pacific National Bank, Wells Fargo Bank and First Interstate Bank, and already those banks are preparing for the anticipated showdown with their rivals from the East. But the deregulation fight may actually be played out among the medium-sized banks, according to many analysts.

Salvatore Serrantino, president of California Research Corp., a financial consulting firm in Santa Monica, said that while there may be acquisitions and mergers among the state’s major banks beginning in 1991, most of the activity will be concentrated among institutions with assets in the area of $1 billion or so.

“These banks are the pearls of the industry,” he said. “The big New York and Eastern Seaboard banks are going to want to come in here and buy banks that will give them some scale right away. I’ve already gotten tremendous calls for institutions over $1 billion.”

Serrantino said smaller banks in California are attempting to reach the “critical mass” of $1 billion in assets in the next few years through mergers and acquisitions of their own in an attempt to make themselves desirable to the out-of-state banks. Their rationale for wanting to be an inviting target is that the premium price would presumably enrich stockholders.

But asset size alone won’t command a premium price.

“In my view, if anybody sits back, thinking that somebody is going to swoop in and pay a premium for them, they are living in a dream world,” said James H. Gray, chairman of Harbor Bank in Long Beach, which has assets of $145 million. “There may very well be a buyer out there for a bank doing a good job, but the banks doing the good jobs may not be for sale. That’s the best deal for the bank shareholder and investor. You make sure the bank is providing service and earning a good return, then you’ve got options in 1991.”

In fact, the most profitable banks in California are invariably small, and frequently new, according to an analysis performed by Serrantino and his associates at California Research on Federal Reserve data from the first quarter of 1987.

The most profitable bank in the state, based on return on assets, was listed as Mission Viejo National Bank in Orange County, which had a return rate of 6.2% on assets of $65 million. The bank was started in 1981.

The largest bank on the list of 100 was City National Bank, the Beverly Hills institution with a return rate of 1.36% on assets of slightly under $3 billion, which ranked it 54th. Serrantino said City National’s profitability stems from a strong management and a special niche it has formed by lending to entertainment projects with a good track record.

But far and away, the most profitable banks were smaller, which Serrantino believes will continue in Southern California banking in the coming years.

“We’re going to have a continuation of a trend that started a few years ago, the surge of independent banks,” he said. “These banks have now matured and are becoming a potent force in the banking community. While a small segment of the industry in terms of assets, they represent a substantial percentage of the number of financial institutions. These institutions rarely get talked about, but they do an excellent job day in and day out in their own marketing niche.”

There is a darker side to the picture of banking in the coming years because no section of the country, regardless of the strength of its economy, is immune from the twin pressures of competition and deregulation that are changing the face of banking across the country.

“There will be buoyancy and growth in the financial service business in Southern California in the next five to six years as well as some blood on the floor,” said Buchman of Union Bank.

As deregulation has blurred the lines among banks, savings and loans, credit unions and investment firms, the industry is going through a shakeout that means that poorly managed banks face more difficulties than ever in the fight for survival, Buchman said.

“Those that are not as competitive, who don’t have a sharp focus and good management, will fall by the wayside,” he said. “We’re seeing that in the marketplace now and I think this trend will continue.”

The nation’s big banks have pushed hardest to expand the types of services banks can offer, but smaller banks are affected, too.

Buchman and Gray, who represent the viewpoints from two very different-sized institutions, agreed that keeping the number of bank failures at an acceptable level will require recognition by legislators that banks must be granted broader powers so that they can get a large piece of the nation’s economic pie.

“I think it is imperative for the long-range health of the banking industry, certainly as it relates to small and medium-sized banks, that the state Legislature and the federal government recognize that the financial industry has changed dramatically and we need added powers to compete in the marketplace,” Gray said.