Study Adds 15 Banks to Vulnerable-to-Takeover List

Weak stock values and lagging profits mean that many of the nation’s largest banks are vulnerable to the sorts of takeovers that have realigned corporate America in the 1980s, according to a study released Thursday by a management consulting group.

The study listed 15 big banks that it said had suffered “disproportionately” since the October stock market crash and face the threat of takeover, joining four others that were already vulnerable. The list includes three of California’s four biggest banks: Bank of America, Security Pacific and First Interstate.

At the same time, the analysis by the MAC Group of Cambridge, Mass., listed nine banks emerging as the industry’s dominant institutions. Among them were six so-called super regionals, including San Francisco’s Wells Fargo, and three traditional leaders, Bankers Trust, Citibank and J. P. Morgan.

These strong banks are likely to shift the power base in the banking industry in coming years as they increase their market share through expansion and acquisition, the study said.

The MAC Group is an international management consulting firm that has worked for half of the 50 largest U.S. banks. Two of the study’s authors, Eileen M. Friars and William T. Gregor, have MBA degrees from Harvard Business School, and the third, Robert B. Hedges, has a graduate degree from MIT.

“What we’ve tried to show is that when you look at a list of the top 15 banks in terms of assets, you are not necessarily looking at the 15 strongest banks in the country,” Gregor said in an interview.

The conclusions of the study are likely to be controversial because of the inclusion of well-regarded banks on the MAC Group’s vulnerable list, including Security Pacific and Bank of Boston, and because of what First Interstate’s chairman called “over-simplistic” findings.

But the rise of the super-regionals reflects similar views by Wall Street analysts, who like those banks because of their strong market share, healthy balance sheets and limited international exposure. Super-regional banks are generally big institutions that concentrate on consumer banking and have little or no international business.

Wells Fargo, with its reputation for cost control and its successful merger with Crocker National Bank, has been a darling of many analysts, so its inclusion among the strong banks was no surprise.

Bank of America’s problems are well known and preceded the market crash. First Interstate began a major restructuring last fall in an attempt to bolster its stock price and avoid the chances of being taken over cheaply.

Analysts have been cautious about Security Pacific, based in Los Angeles, because its earnings have lagged recently and the company is considering steps to improve profitability and reduce the risk of a takeover.

Bank regulators have added to the takeover pressures by sanctioning more mergers, and states are removing barriers to interstate banking.

California law does not allow out-of-state banks to buy institutions here until 1991, so the three state banks on the vulnerable list have some breathing room.

They are not entirely safe, however. Investors from outside the banking industry could try to buy them, and foreign institutions can buy California banks. For instance, California First Bank, a Bank of Tokyo subsidiary, announced Monday that it is buying Union Bank, the state’s fifth largest.

The MAC study examined 46 top banks using two means to measure strength--market value and market-to-book ratio.

Market value is the stock price multiplied by the total number of outstanding shares. Simply put, market value reflects how the stock market values the bank; a bank with a low market value is “relatively affordable” for an acquirer, said the study.

Book value is shareholder equity, or what is left when a bank’s liabilities are subtracted from its assets. The market-to-book ratio used in the study compares the value placed on the bank by the stock market with its book value. If this ratio is less than 1, meaning that the market values the institution at less than its shareholder equity, the bank would presumably be a takeover bargain.

Bank of America in San Francisco was one of four big U.S. banks with ratios under 1 before the crash, according to the study. The others were Continental Illinois, First Republic and Manufacturers Hanover.

Way to Improve Ratio

Banks on the MAC Group’s vulnerable list all had ratios of less than 1 as of Dec. 30, 1987. Bank of America’s ratio was 0.47, First Interstate’s was 0.84, and Security Pacific’s was 0.90.

Weak banks will also have more difficulty meeting new federal guidelines for strengthening their capital, which will increase their vulnerability to takeovers, said the study. The new guidelines will be phased in by 1992.

Market-to-book ratio can be improved by restructuring and selling off assets to improve earnings.

First Interstate of Los Angeles announced plans last October to cut its assets by $6 billion to $7 billion to reduce its vulnerability to takeover and improve profitability.

“I get kind of tired of these over-simplistic analyses,” said Joseph J. Pinola, chairman of First Interstate. “We probably took a greater beating last year than any other bank in America. But what we have done by restructuring ourselves and taking all the losses is to position us strategically for great improvements this year.”

The study is based on stock prices on Dec. 30, and bank stocks in general have rallied in the first two months of 1988. As of last Friday, Bank of America’s market ratio was 0.54, First Interstate’s was 0.92, and Security Pacific had emerged from the vulnerable zone, reaching 1.13.

Wells Fargo’s market-to-book ratio of 1.40 on Dec. 30 placed it among the nine strong banks. The other super-regionals on that list were Banc One, Columbus, Ohio; PNC Financial, Philadelphia; SunTrust, Atlanta; First Union, Charlotte, N.C., and Fleet Financial, Providence, R.I.

Citibank and Bankers Trust, both in New York, were on the list despite suffering substantial losses in value since the crash because their market values remain high. J. .P. Morgan is parent of Morgan Guaranty in New York, the most profitable money-center bank.

In addition to three California banks and Bank of Boston, the banks listed as vulnerable were AmeriTrust, Bank of New York, Boatmen’s Bancshares, Chase Manhattan, Chemical Bank, Continental Illinois, First Bank System, First Chicago, First Republic, Manufacturers Hanover, Irving Trust, Mellon Bank, NCNB, Shawmut, and Valley National.