Banks, S&Ls; Will Show It When California Bottoms
If you don’t feel like counting outgoing U-Hauls on the 15 Freeway at Barstow, there’s an easier way to gauge the direction of the California economy: Look at the real--and perceived--health of the state’s banks and S&Ls.;
If loan losses are still mounting, and investors are still shunning California bank and S&L; stocks, it’s a good bet that the state economy remains on the down slope. Conversely, when those two trends change for the better, there’s a high probability that the economy is at least bottoming.
The word from the banks/S&Ls; and their investors is that the bottom isn’t here--yet. But the surprise may be that it’s not that far off. A look at the mixed evidence to date from the lenders’ camp:
* Loan write-offs at many California banks and S&Ls; weren’t disastrous in the second quarter, by and large. Still, there were enough new problems that many investors have become far more jittery about the companies.
Case in point: Los Angeles-based Great Western Financial earned $69 million, or 50 cents a share, in the second quarter, not a bad showing in a tough economy. But the S&L; unnerved some Wall Street analysts by setting aside another $69 million for loan losses, $30 million more than it set aside in the same quarter a year earlier.
Tuesday, Great Western stock lost 12.5 cents on the New York Stock Exchange to close at $16.25, its low for the year.
* First Interstate Bancorp, the L.A.-based banking giant, says in a new financial filing with the Securities and Exchange Commission that there are no clear signs of an upturn in California. The only positive news was that the bank expects growth in other western states to help boost earnings in the second half of 1992.
* Corporate officers at some smaller California banks have turned from being buyers of their own shares earlier in the year to being sellers now. If you assume that they should know best about their own banks’ prospects, the selling isn’t encouraging.
Invest/Net of Miami, a company that tracks corporate officers’ stock transactions through their SEC filings, reports that its universe of western banks ranked seventh out of 69 industries in “insider accumulation” in February--meaning insiders were buying.
This month, the western bank group has fallen to 25th in the rankings, mainly because of heavy insider selling of California bank stocks, Invest/Net chief Robert Gabele says. His list of California banks whose insiders have been dropping shares includes Silicon Valley Bancshares of San Jose, Guardian Bancorp of L.A. and First Commercial Bancorp of Sacramento.
If insider selling at banks is a negative, however, it doesn’t necessarily mean disaster ahead for the lenders. But an unstoppable tide of bad loans can mean ruin, for the banks and the economy. And for that reason, one of the most-watched barometers of Southern California’s economy is the trend in loan problems among the region’s major S&Ls.;
Single-family home mortgages make up the vast majority of loans in S&L; portfolios (loans on commercial buildings make up the rest). And at gut level, nothing is more revealing about a local economy than how the average homeowner is faring. If Southern California has much farther to fall economically, “the home mortgage portfolios at the S&Ls; will tell the tale,” says Jon Gray, analyst at Sanford C. Bernstein & Co. in New York.
As the accompanying chart shows, non-performing (or delinquent) loans at major Southland S&Ls; have risen sharply over the last year, measured as a percentage of each institution’s total assets. But the greatest increases occurred in the second half of 1991. At most S&Ls;, the pace has slowed significantly this year--despite the general perception that the Southland economy has tumbled since Jan. 1 and that housing prices have crashed.
Gregory Cochran, senior vice president for loan servicing at Glenfed, parent of Glendale Federal bank, says mortgage loan delinquencies have been “relatively flat for the last several months,” which he considers an encouraging sign.
Likewise, the head of mortgage banking at Great Western, E. S. (Sam) Lyons, says the rate of defaults has remained manageable despite the gloom over L.A. and environs. “We believe we’re seeing the peak now (in delinquencies), and that they should slowly abate between now and the end of the year,” he says.
Particularly in the last three weeks, Lyons says, “we’ve had more ‘cures’ of loans in default,” meaning out-of-work borrowers who were late have been able to pay up--in most cases, because they found new jobs. “More people are telling us they’ve been re-employed,” Lyons says.
Of course, there’s no way the S&Ls; can be sure this isn’t merely a pause before a dramatic new round of mortgage defaults. By all indications, layoffs in Southern California aren’t finished.
But if the delinquency trend continues to stabilize, meaning that the most vulnerable borrowers have already been shaken out, the next step could be the rehabilitation of the stocks of the S&L; survivors. Many of those stocks are languishing, even though they sport low price-to-earnings ratios and high dividend yields. Great Western and H. F. Ahmanson, parent of Home Savings, are particularly cited as potential bargains by Wall Street--when California bottoms.
You don’t need a rebound in the economy to spark a sudden round of buying of bank and S&L; stocks, analysts note. All you need is for people to believe that things have stopped sliding.
“In New England, we’ve had a remarkable recovery in the banking system without any help from the economy,” says Gary Gordon, analyst at PaineWebber in New York. “Things just stopped getting worse.”
Southland S&Ls;: Have Bad Loans Peaked?
The increase in bad loans at most major Southland S&Ls; slowed in the first half of this year from the second half of 1991. But some analysts fear another surge.
Non-performing loans as pct. of total assets: S&L; 6/91 12/91 6/92 Calfed 4.23% 5.55% 6.24% H.F. Ahmanson 2.79% 3.74% 4.80% Glenfed 3.32% 4.20% 4.62% Great Western 3.53% 4.04% 4.58% Downey Savings 0.52% 0.97% 1.50%
Source: Institutions listed
