Union Bank Cuts Costs as It Makes Move to NYSE

At the New York Stock Exchange this afternoon, the chief executive of Union Bank of California will be on hand to ring the closing bell, celebrating the company’s debut on the prestigious exchange.

But the reverberations from Wall Street investors have already been resonating through California’s second-largest bank as it has embarked this year on what most agree is an overdue restructuring.

In February, Union Bank’s troubled Japanese parent, Bank of Tokyo-Mitsubishi, was forced to sell a 17% stake in the San Francisco-based bank to raise cash and appease Japanese bank regulators. The deal raised $750 million for Bank of Tokyo-Mitsubishi and substantially boosted Wall Street’s interest in the California subsidiary, which has remained strong despite its parent’s problems.

Now Union Bank, the primary subsidiary of UnionBanCal, with about $32 billion in assets, is discovering the price of popularity on Wall Street. A newfound financial discipline is working its way through a bank that has been criticized as passive and inefficient.

Eager to show investors that it means business, Union Bank launched a sweeping review of all its operations in March, with an eye toward slashing expenses by about 10%, or more than $100 million, by the end of next year. Branches and offices will be closed, jobs eliminated and the bank will focus on more profitable units.

Details about the program will be announced next month. The effects will be felt most strongly in Southern California, where the bulk of Union’s employees live and work. About 7,500 of Union’s 9,745 employees are based south of San Luis Obispo, in about 150 branches and regional offices, including Union’s tower in downtown L.A.

Robert Walker, vice chairman at Union and the restructuring project’s leader, said he has long urged his Japanese bosses to cut costs. But the foreign parent--which still owns a 64% stake--got the message earlier this year when it tried to sell its stock to U.S. mutual fund managers and institutional investors, who questioned whether Union was serious about improving shareholder value.

“They told us, ‘If you want to play with the big boys, you have to perform like the big boys,’ ” Walker recalled.

By most measures, Union is already a strong performer. The bank’s return on assets--a key measure of bank profitability--is 1.57%, or more than 50% better than its peer group.

But when it comes to managing expenses, the bank’s commitment has been soft. In particular, analysts say Union did a poor job of consolidating operations after the 1996 merger with Bank of California, resulting in redundancies that were never addressed.

“It’s a show-me stock,” said Joseph Morford, analyst at First Security Van Kasper in San Francisco. Union, he said, has finally gotten around to integration work it should have done two years ago. “The burden is on Union to show they can execute,” he said.

Other investors agree. Union’s stock trades at a price-earnings ratio of about 13, or 20% cheaper than comparable banks. The stock price--which sank 17% in the days before the February sale by Bank of Tokyo-Mitsubishi--has since recovered, closing Tuesday at $36, up 31 cents on Nasdaq.

A team of nearly 40 Union managers are working full time to gather and implement ideas for cutting costs and boosting revenue. No department is immune, though Walker said he doubted that the bank would make any substantial reductions to its mutual fund unit or its consumer businesses, such as mortgages and retail banking. The company already exited the credit card business last year because profit margins were too thin.

Walker also said that one of Union’s most controversial revenue-boosting programs--sharing of customer data with telemarketers--has been abandoned. Last week, Union was flooded with complaints after it said it was working with a telemarketing firm accused in Minnesota of deceptive practices. Union, which admitted it released some customers’ names and account balances to the firm, would have collected a cut of every sale.

“It was embarrassing,” Walker said, adding that the bank has since retrieved the customer information and terminated the deal.

Walker said there are no specific goals for cost cuts or job reductions, but the bank wants to move its efficiency ratio--which is total expenses divided by operating revenue--of 61% down to the industry average of about 50% to 55%.

The focus on cost-cutting has led some to ponder whether Union’s Japanese parent is slimming the bank down for a possible sale. The fact that Union is concentrated in one of the nation’s hottest banking markets has made it--and virtually every other mid-sized bank in California--a constant takeover target.

But Union Bank officials said there are no plans to sell.

“We are not slimming down in preparation for a sale,” Walker said. “We are doing this because it’s time to do this. We are doing this for ourselves.”