Market Analysts Turn Bullish on BankAmerica : Big Turnaround Forecast; New Ability to Cope With Loan Problems Credited

Banking industry analysts said Wednesday that they are more optimistic than ever that BankAmerica will show solid profitability in 1988, reversing three years of record losses.

The parent company of Bank of America, the nation’s third-largest bank and California’s biggest, has impressed the analysts by substantially reducing its bad loans and trimming overhead by $500 million last year.

Some analysts who were briefed by bank officials this week said BankAmerica will post a profit in the range of $80 million to $85 million for the first quarter of this year, which ends today. It would mark the third consecutive quarter of modest but growing earnings.

“It is my strong feeling that Bank of America has definitely turned the corner in a very significant way in a number of areas,” said Stephen Berman, a banking analyst with the New York investment firm of County Securities.

Berman and other analysts, however, stopped short of giving a clean bill of health to the San Francisco-based banking company.

A recession in the United States or new problems with loans to Latin American countries would likely create more problems at B of A than at other big banks because of its fragile financial condition.

“If there were a need to make a sizable addition to reserves for Latin debts, Bank of America would be the most severely shocked of any of the multinational banks,” said Dan B. Williams, an analyst with the San Francisco brokerage firm Sutro & Co.

Stock Likely Beneficiary

In addition, the bank faces the difficult task of improving its financial condition to meet new capital guidelines being devised by federal regulators for 1990.

Despite those caveats, some analysts who monitor bank performance for investment houses and make recommendations on which stocks to buy or sell have turned bullish on BankAmerica. The new mood could send the price of the bank stock higher and add momentum to the bank’s recovery effort.

The first public expression of confidence came Tuesday when Salomon Bros., a leading New York investment house, added BankAmerica to its list of 45 recommended stocks. The firm said the company’s improved loan portfolio and tight rein on overhead expenses mean that its stock should rise in the coming months.

On Wednesday, Paul H. Baastad, chief bank analyst in San Francisco for the S. G. Warburg investment firm, said in a telephone interview that he has suggested for the first time in three years that customers buy BankAmerica shares.

“It seems like the first-quarter (1988) trends are coming in quite favorably,” Baastad said. “Loan losses will remain at a low level, and we will see signs of expense controls.”

Barring a recession or new problems with foreign debt, analysts said they expect BankAmerica to earn more than $300 million in 1988, contrasted with a loss of $955 million last year.

Sutro’s Williams said he does not expect BankAmerica to pay a common stock dividend in 1988, despite his projection of $370 million in profits. He said the corporation is likely to retain the money in an effort to rebuild its tattered capital.

Bad loans dragged B of A down, and learning to cope with bad loans is largely responsible for its recovery in the eyes of the analysts. Improvements have been made in early detection of loan problems and working out the difficulties, and the bank has become more aggressive in recovering money from bad loans.

“The biggest thing that they have done was to really address the problems with their loan portfolio in the last couple of years,” Berman said.

A key measure of this progress is net credit losses, which reflect loans written off as losses, minus money recovered from other troubled loans. The figure has declined from a high of $527 million in the fourth quarter of 1985 to $128 million in the last quarter of 1987. Analysts said the figure for the first three months of this year will be about the same as the last quarter.

Another major problem for BankAmerica has been bloated overhead costs. In an effort to reduce expenses, the company eliminated 9,600 jobs in 1986 and 9,000 last year. Analysts expect another 5,000 to 6,000 jobs to be eliminated this year from the staff, which numbered 59,500 at year-end. Many of the jobs will be lost as the bank scales down its international operations, but some cuts will take place in California.

New Management Cited

“The company still has not shown the reduction in overhead costs that I believe it needs to show,” Berman said. “They have made some progress, but not enough. That does not happen overnight.”

Analysts credit the new management brought in during the past three years with accelerating the progress at BankAmerica. Singled out were Glenhall E. Taylor Jr., who joined in 1985 as head of credit policy at Bank of America, and Richard M. Rosenberg, who became head of the parent company’s California banking operation last June.

Berman said A. W. Clausen, who returned in October, 1986, as BankAmerica chairman, also should receive some credit for the apparent turnaround.

The most difficult task remaining for the bank, the analysts said, is B of A’s enormous $9.2 billion in loans to less developed countries.

Three years of corporate losses totaling $1.8 billion prohibited the bank from setting aside sufficient amounts of money to cover potential losses from loans to such countries as Brazil and Mexico, the analysts said.

BankAmerica has reserves equivalent to about 21% of its LDC loans, compared to 25% at most big New York banks and more than 50% at the other three major California banks--Security Pacific, Wells Fargo and First Interstate. The bank’s weak capital base means that it would be among the big banks least able to afford boosting LDC reserves.

The potential LDC problem is viewed as a barrier to optimism by some analysts, such as George M. Salem at Prudential-Bache Securities in New York. Salem recently wrote clients that BankAmerica would use up all of its equity capital if it is required to boost reserves to 50%, and he rates the stock a poor investment.