New BofA May Move Cautiously Overseas : * Banks: The merger will create a formidable entity, but on the global scene it is still no match for its huge Japanese and European rivals.
California’s two largest banks will merge into a formidable entity poised to battle for the national retail market, but on the global banking scene, the new BankAmerica may shy away from the heat. Once the largest in the world, it will still be small potatoes in the eyes of its Japanese and European rivals.
In fact, the behemoth Japanese banks that dominate international finance may hardly perceive the new BankAmerica as real competition.
BankAmerica and Security Pacific were no exceptions to the trend in recent years that has seen U.S. financial institutions, once unrivaled creditors to the world, retreat hastily from overseas markets. Stung by Third World debt, nervous about high risks and disappointed by returns in the overcrowded field of specialized merchant banking, American banks have been withdrawing, humbly, from the front lines, analysts say.
The two big California banks have not completely packed up and come home--there are still profitable niche markets to exploit abroad. But they have reversed their expansion into the Asia-Pacific region and other foreign markets to consolidate their main lines of business, primarily in the domestic market.
“Rightly or wrongly, I don’t think anybody here in Tokyo regards the merger as significant for global competitiveness,” said Alicia Ogawa, banking analyst for S. G. Warburg Securities (Japan). “I think there’s a lot of smugness that the merger was something forced on them for economic reasons, rather than a free choice.”
Officials at B of A were not available to discuss future strategies in global banking for the merged institution. But it seems clear that the bank--which for many years until 1981 was ranked largest in the world in terms of assets--is not making immediate plans for a comeback overseas.
“We still consider ourselves a global bank,” said Sharon Tucker, a B of A spokeswoman who characterized the institution’s reduced profile abroad as a necessary move to get its house in order. “The bank was trying to be all things to all people, from the Philippines to Italy and California,” Tucker said. “It simply wasn’t possible.”
Teetering precariously under the weight of an $8-billion loan portfolio to less developed countries (LDCs), especially Latin America, B of A backed out of operations in Japan in the mid-1980s and sold off its subsidiary bank in Italy. (The latter move might seem ironic for the institution that opened its doors in San Francisco in 1904 as the Bank of Italy.)
Foreign operations accounted for 35.2% of the bank’s total average assets in 1985, but that figure had shriveled to 20.2% by last year.
“After World War II, (Bank of America founder) A. P. Giannini had a strong vision of becoming the bank that would develop the Pacific Rim,” said Karen Shaw, a consultant with the Institute for Strategy Development in Washington and a former vice president of the bank. “But that vision died with LDC debt.”
Security Pacific has followed a similar path of retrenchment. Until recently, it was noted for its aggressive expansion into the Asia-Pacific region and forging a strategic alliance with Japan’s Mitsui-Taiyo-Kobe Bank.
But it sold its retail banking subsidiary in Hong Kong, scrapped its merchant banking division and shut down corporate lending activities in Europe and Australia, where it was hurt by bad loans. The overseas share of business peaked at 21% in 1987 and was as low as 16.6% last year.
The merger will help hoist BankAmerica in the direction of its old premier spot in the international lineup of total assets, a key measure of a bank’s ability to deploy capital in wholesale loans to companies for trade or capital investment.
With the infusion of assets from Security Pacific, BankAmerica would rise from No. 46 to No. 24 on the list compiled by the trade journal American Banker. Security Pacific was ranked 62 in the survey, based on bank and bank holding-company assets as of the end of last year.
Only 11 U.S. financial institutions ranked in the top 100. Citicorp, parent of the nation’s largest bank, ranked 21; American Express was No. 36.
The new Bank of America’s assets--estimated at $193 billion--are dwarfed by those of Dai-Ichi Kangyo Bank, now the global king. As of March 31, Dai-Ichi Kangyo’s assets were reported at 62.5 trillion yen, or about $460 billion at current exchange rates.
Size isn’t everything, though.
By other measures of a bank’s value and performance, major U.S. banks compare favorably to their cash-rich Japanese competitors. The rate of return on total assets for B of A was 1.04% last year, while DKB was 0.15% for its latest fiscal year.
It was also far more profitable--net profits were $1.1 billion, compared to about $736 million for DKB, although the latter figure reflects considerable pretax losses in the Tokyo stock market crash.
In the ratio of equity to assets, which indicates the strength of a bank’s capital base, BankAmerica outscores DKB: 5.88% at the end of last year, compared to 3.91% for the Japanese giant.
Still, the share of LDC debt in the loan portfolios of Japanese banks is typically below 10%, minimizing their risk, and they have generally been less exposed to real estate and construction borrowing than the Americans, according to S. G. Warburg’s Ogawa.
In the highly competitive arena of international lending, Japanese banks used relatively low interest rates at home to discount loans and capture strategic clients in the 1980s, and they still have a reputation for shaving profits to hold on to their gains.
Some of the heavyweights among the French and German banks are nationalized, giving them solid backing and government protection. Combine with these factors the regulatory barriers in Japan and Asia, and it makes for an extremely tough environment for shakier U.S. players.
“The Japanese banks have been really cutthroat, especially in Southeast Asia,” said Robert Zielinski, an analyst for Jarding Fleming in Tokyo. “They offered razor-thin spreads on their loans, because their interest is in market share, not short-term profits.”
But consolidation and rationalization in their domestic lines of business could conceivably prepare B of A and other U.S. banks for another serious foray into world markets--someday.
“I don’t think this transaction (the merger) necessarily signals a rejuvenation of American banks in the global sense,” said Richard Barrett, banking analyst for Salomon Bros. in New York. “The impact internationally will come later, when Bank of America and other large, profitable and well-capitalized banks get formed and can use their new strength as trade banking intermediaries.”
U.S. banks have an advantage over Japanese and European rivals in being able to rationalize quickly, shedding excess capital, streamlining operations, automating and eliminating redundant jobs.
Also, Congress is contemplating reforms of U.S. banking laws that could roll back the Glass-Steagall Act, which dates from the Depression era and bars banks from engaging in securities trading and underwriting.
Lacking domestic experience in those lucrative fields, some U.S. banks, such as Security Pacific, ran into serious trouble when they attempted to try their hands at competing in unregulated offshore markets. The breakdown of the wall in the United States between traditional lending and providing more specialized financial services could level the playing field for American banks.
But will American banks return to global prominence, and will BankAmerica regain its leadership role?
George Parker, a professor at Stanford Business School and a former executive at Security Pacific, is pessimistic.
“It’s a little difficult to identify areas where American banks have a competitive edge in the global market,” Parker said. “My first reaction is to ask, ‘My goodness, why should they bother?’ ”
“American banks will never in our lifetimes dominate global banking the way they did 15 to 20 years ago,” Parker added. “But this only reflects the fact that our dominance of the global economy has declined considerably, and will never be the same.”
But Shaw, the consultant in Washington and former Bank of America executive, still shares a little of A. P. Giannini’s vision.
“These things tend to go in cycles, and I hope they do take another look at the international market,” Shaw said. “The old saying is that trade follows finance--American companies will never be strong in international markets unless banks are too. No foreign bank really wants to finance imports into its own market.”
* RELATED STORY: D2
WORLD BANKING CONTENDERS The merger of BankAmerica and Security Pacific will create a banking powerhouse in the United States, but on the world scene the combined institution will still pale in comparison to Japanese and European giants
Banking companies, ranked by total assets as of 12/31/90
Rank Institution Headquarters Total Assets (in $ billions) 1. Dai-Ichi Kangyo Tokyo $428.2 2. Sumitomo Bank Ltd. Osaka 409.2 3. Mitsui Taiyo Kobe Tokyo 408.8 4. Sanwa Bank Osaka 402.7 5. Fuji Bank Tokyo 399.5 6. Mitsubishi Bank Tokyo 391.5 7. Credit Agricole Mutuel Paris 305.2 8. Banque Nationale de Paris Paris 291.9 9. Industrial Bank of Japan Tokyo 290.1 10. Credit Lyonnais Paris 287.3 21. Citicorp New York 214.8 24. BankAmerica* San Francisco 192.9
* combined assets of BankAmerica and Security Pacific as of 12/31/90 ..... However, for what major U.S. banks lack in asset size, they make up in overall financial strength versus their foreign rivals. Top banking companies, based on equity capital as a percentage of assets as of 12/31/90.
World Equity capital as a Rank Institution Headquarters percentage of assets 6. Wells Fargo San Francisco 6.06 8. BankAmerica* San Francisco 5.88 9. Manufacturers Hanover* New York 5.68 11. J.P. Morgan New York 5.64 13. Security Pacific* Los Angeles 5.61 32. Credit Agricole Mutuel Paris 4.78 44. Deutsche Bank Frankfurt 3.91 48. Sumitomo Bank Ltd. Osaka 3.76 59. Sanwa Bank Ltd. Osaka 3.27 62. Dai-Ichi Kangyo Tokyo 3.21 74. Mitsui Taiyo Kobe Tokyo 2.86
* Pre-merger status Source: American Banker