Bullish Outlook for First Interstate Drives Stock Higher

First Interstate Bancorp’s stock price shot up again Thursday after three analysts issued bullish reports on the financial prospects of the Los Angeles banking company.

First Interstate stock rose $3.375 on Thursday to close at $63.125 on the New York Stock Exchange. It was a new 52-week high and came after fairly heavy trading in which 502,400 shares changed hands.

The company’s chief spokesman, Simon Barker-Benfield, said management feels that the stock’s recent performance reflects a recognition among investors that First Interstate has made significant progress in cutting costs and improving earnings over the past year.

The stock has climbed more than $13 a share in the past month. It jumped sharply last week after Joseph J. Pinola, the chairman and chief executive, told institutional investors in New York that the company expects improved earnings as a result of cost controls and job cuts.

Pinola also said the worst appears to have passed in Texas, where First Interstate Bank of Texas has been losing money since the Los Angeles company acquired it last year.

Potential Profit

Some analysts speculated that investors recognize they have a potential profit in First Interstate whether or not the company fulfills its promise to improve earnings in the next 18 months.

The reasoning is that if the earnings go up, the stock price will follow. If the company fails to perform, First Interstate is likely to be the target of a hostile takeover in 1991. That, too, would be likely to push the stock price up.

California opens its doors to full interstate banking in 1991, which means that out-of-state banks will be able to acquire institutions in the state.

First Interstate owns banks in 13 states, and some investment bankers believe that the individual banking affiliates and some non-banking businesses could be sold off individually by an acquirer at a profit well above the acquisition price.

One investment banker on Wall Street, who asked that his name not be used, said the recent stock rise may indicate that someone is accumulating First Interstate shares in expectation of a possible takeover attempt.

But Barker-Benfield said management is not aware of any takeover plan, and he discounted the notion.

Most analysts said the stock is rising because First Interstate appears to be beginning to fulfill its promise to cut costs and combine operations in various states for greater efficiency and ultimately higher earnings.

‘Definite Progress’

“What we feel is that Joe Pinola has promised a great deal over the last couple of years, and he is starting to come through,” said Thomas H. Hanley, banking analyst at the Salomon Bros. investment firm in New York. “Some of his promises are starting to become reality, and the marketplace is starting to respond accordingly.”

Hanley was one of the three analysts who issued strong “buy” recommendations to investors Thursday on First Interstate. The other two were J. Richard Fredericks at Montgomery Securities in San Francisco and Richard X. Bove at Dean Witter Reynolds in New York.

Fredericks said in a report to investors that the bank has made “definite progress” in controlling costs and on other fronts. While he said some of the recent stock increase is the result of speculation, Fredericks said the bank is turning into a solid performer.

Hanley said First Interstate has been particularly successful in improving results at four of its five biggest banking divisions: California, Nevada, Oregon and Washington. The fifth, Arizona, has suffered from high real estate losses, but Hanley said it remains basically sound.

“You could see institutional investors looking at the top five banks and saying the value of those five is greater than that of the entire holding company,” Hanley said. “You look at the returns on assets of those top five banks, with the exception of Arizona, and the improvements are dramatic.”

Return on assets is viewed as a good indicator of a bank’s operating efficiency. A ratio of 1% or higher is considered good. ROAs at all five of First Interstate’s biggest banks were above that figure at the end of the first quarter of this year, while many its other banks lagged behind.

FIRST INTERSTATE AT A GLANCE

Return on assets at five biggest First Interstate banks

Full year 1st qtr. ’88 (%) ’89 (%) Arizona 1.17 1.01 California 0.98 1.46 Nevada 1.30 1.54 Oregon 1.31 1.34 Washington 1.19 1.55

Source: Salomon Bros.