A broad selloff of bank stocks Wednesday hit California's big three banks especially hard and peeled off nearly $600 million from the paper value of Wells Fargo & Co.'s hostile bid for rival First Interstate Bancorp.
However, analysts said the selloff--sparked partly by fears about problem consumer loans--should have little effect on Wells' takeover effort, since there was no major change in the banks' values relative to each other.
San Francisco-based Wells, California's third-largest banking company, on Oct. 18 announced an unwelcome offer for No. 2 First Interstate, based in Los Angeles.
First Interstate has not rejected the offer, but its chairman, William E.B. Siart, said he was "very disappointed" by Wells' action.
When Wells' stock peaked that day at $230.25 a share, its offer to exchange five-eighths of a share of its stock for each First Interstate share was worth $10.9 billion. But on Wednesday, with Wells closing at $207.25, down $12.25 in trading on the New York Stock Exchange, that value had slumped to about $9.8 billion.
First Interstate stock slid 8% on Wednesday, to close at $120.50 on the NYSE, down $10.50. Bank of America lost $2.875, closing at $59.875 in NYSE trading.
"All of a sudden, somebody blew the whistle on the whole banking sector and everybody scrambled to lock in their profits," said Paul Mackey, an analyst with Dean Witter Reynolds.
The banking sector has performed spectacularly this year. Standard & Poor's index of major regional bank stocks hit a yearly high of 243.72 last week on the day Wells Fargo made its bid public. On Wednesday, the index dipped to 226.51 but was still up a stunning 40% since the beginning of 1995.
Nervous investors seemed to need an excuse to take profits, so they seized on signals of problems with consumer credit, Mackey said.
Money Store Inc., the New Jersey-based consumer finance company, got stripped of nearly a quarter of its market value Wednesday, a day after its stock had hit a high for the year. Money Store shares dropped $12.625 to close at $42.50 on Nasdaq after it announced that overdue home-equity loans had risen during the third quarter to 5.47% of its portfolio from 4.29%.
Los Angeles-based Aames Financial Corp., another home-equity lender, also was punished. Its shares fell $4.25 to close at $29.25, also on Nasdaq. That was despite Aames' report Wednesday that its quarterly profit had more than doubled on a sharp increase in revenues. An Aames spokeswoman said the company did not experience any rise in delinquencies similar to the Money Store's.
The reaction--especially as it spread through the banking sector--was overdone, analysts said.
"I don't know why anyone would get freaked out about credit quality, especially with Wells and First Interstate," said analyst Raphael Soifer of Brown Bros. Harriman, noting that both banks accumulated such large reserves against loan losses in the early 1990s that they have not had to add anything to those cushions recently.
"I still think the [Wells-First Interstate] deal is going to happen," Soifer said, "but First Interstate has to go through the exercise of exploring its options and possibly getting a slightly better exchange ratio."
On the day of the bid, First Interstate stock traded slightly above the indicated value of the offer, showing that investors believed the deal would happen quickly and that the price would probably rise.
On Wednesday, however, First Interstate closed $9 below the current indicated value of $129.50 a share. Mackey called that a more normal spread, reflecting investor uncertainty about whether resistance by First Interstate might delay or even scuttle the deal.
* INVESTOR JITTERS: Nervousness about financial stocks affected the broader market. D3