Some Analysts Question B of A’s Rebound Claims : Bank’s Expenses, Quality of Some Loans Challenged Despite Admitted Gains

A few weeks ago, J. H. Canvin walked two blocks from Bank of America’s San Francisco headquarters to Hoefer & Arnett, a small investment banking firm. As head of investor relations at B of A, Canvin was concerned about an unflattering analysis of the bank written by Alan Hoefer.

Hoefer & Arnett specializes in small independent banks in California, so the firm is not privy to the detailed financial figures B of A provides to big investment firms, such as Salomon Bros. and Merrill Lynch in New York.

Courting banking industry analysts at major firms is a key part of B of A’s attempt to portray itself as a recovering institution after three years of record losses that have depressed its stock price and made raising new capital difficult and expensive. The analysts are important because they advise institutions and other big investors on stock purchases, and their opinions can affect stock prices.

Some big investment firms have adopted bank Chairman A. W. Clausen’s line that B of A and its parent company, BankAmerica, have turned the corner--a judgment based on six quarters of improved earnings and progress in cutting expenses and trimming bad loans.

But Hoefer’s report showed that he was not on the bandwagon. In fact, he had used the bank’s own numbers to shoot some pretty gaping holes in the recovery theory by raising questions about the quality of the bank’s loans and the effects of its elimination of 29,000 of its almost 90,000 jobs in the past four years.

Canvin wanted to reverse Hoefer’s view by providing him with the type of analysis of the bank’s quarterly earnings that had convinced some of the big guys. He also wanted to explain the vital role played by the bank’s new management.

“He made a major case about substantial changes in senior management and all the great things they were going to do,” Hoefer said in an interview last week.

Did the 45-minute conversation change his mind? “No,” Hoefer said. “I would say it reinforced some things that we had observed that we didn’t write about.”

Hoefer declined to specify what he meant but said it had to do with the way the bank is being managed.

Canvin and the bank’s chief financial officer, Frank N. Newman, were on vacation last week and not available for comment. However, a spokesman said the bank “clearly doesn’t agree with Hoefer’s conclusions.” He also pointed out that Hoefer & Arnett does not keep as close an eye on the company as other analysts who specialize in big banks.

But last week there was some agreement from an analyst who does watch BankAmerica and the nation’s other major banks.

J. Richard Fredericks of San Francisco’s Montgomery Securities, who is viewed as particularly astute in analyzing financial data, said in a new report that progress has been made during the past year in some areas at B of A. But he added that the bank’s expenses are still higher than those of other big banks, leaving it vulnerable to an economic downturn. He said 8.15% of B of A’s outstanding loans are troubled, the highest percentage of any U.S. bank outside Texas.

Part of the difference of opinion between those who have signed on to the turnaround theory and those who remain skeptical lies in the interpretation of the numbers on the bank’s financial performance.

B of A officials point out areas of progress, such as a 10% reduction in overhead between March, 1987, and March, 1988, and an 18.5% reduction in the total amount of loans classified as troubled in the same period.

Salomon Bros. looked at the trend and at the end of March put the bank on its list of recommended stocks to buy. Clausen was adamant at last month’s annual stockholders meeting that the bank is “well on the road to recovery.”

But Hoefer looked at the figures and interpreted them differently: Take operating expenses and the elimination of thousands of jobs, for example.

Between 1986 and 1987, Hoefer found, the bank’s expenses as a percentage of actual operating income increased to 82.2% from 78.2%. Sure, he said, aggregate expenses were down, but that was attributable to the sale of certain business lines and a reduction in the bank’s size, not increased operating efficiency.

Different Interpretation

“BankAmerica has been emphasizing its reduction in (employee) head count,” he said in his report. “To us, this has been a matter of fascination as we see, firsthand, many of the finest bankers (the most employable elsewhere) drift away. Experience and relationships are being lost that are irreplaceable.”

Another measure of a bank’s operating efficiency is its amount of assets divided by the number of employees, and in this area Hoefer again found B of A lacking. At year-end, the assets per employee figure was $1.56 million at B of A, compared to $2.2 million at Wells Fargo and a $2.1-million average at all big U.S. banks.

Hoefer veered most from the B of A line in the area of credit quality, or the quality of the bank’s loans to customers. Rather than improving, Hoefer said, B of A’s domestic loan losses have actually gotten worse.

“More is being lost per dollar loaned,” he said.

Subjective Call

Domestic loan losses since 1983 have totaled $3.75 billion. As a percentage of total domestic loans outstanding, domestic credit losses have risen from 1.51% in 1985 to 1.70% in 1986 and 1.74% in 1987.

The improvement in loan quality cited by the bank has come primarily in the area of foreign loans, which Hoefer called “the ultimate of judgment calls” because determinations on when to place such loans on the troubled list is highly subjective.

Fredericks at Montgomery Securities also differed considerably with B of A on the quality of its loan portfolio.

He said that despite its high ratio of troubled loans, the bank has been reporting loss ratios that are well below industry norms. Fredericks said that seemed “illogical,” and he questioned whether the bank is acknowledging all of its potential loan losses.

In his report, Fredericks said the bank had told him that its loss ratios are low because it has recognized problem loans earlier than the rest of the industry and is better at recovering money from the losers.

Still, Fredericks said he has “philosophical differences of opinion” with the company about its progress on loan quality and is still advising investors not to buy BankAmerica stock, although he has upgraded his view from negative to neutral.

Hoefer was blunter in an interview. He said banks have wide latitude in the figures they report in quarterly earnings statements, which could allow an institution to publish more optimistic numbers than the situation warrants.

Earlier this year, BankAmerica settled a lawsuit by shareholders that accused the company of concealing its deteriorating financial condition in the mid-1980s. Disgruntled shareholders also have accused the bank of inflating its earnings in the late 1970s.

“Clausen has a reputation for skillfully managing earnings, not skillfully managing a bank,” Hoefer said. “It makes me concerned. I wouldn’t get bitten twice if I were an analyst or an investor.”

A bank spokesman responded, “The record does and will speak for itself.”