Consolidation Likely to Spark a Domino Effect

The disclosure that BankAmerica Corp. will merge with Security Pacific Corp. sparked speculation Monday that California’s other two major commercial banking companies, First Interstate Corp. and Wells Fargo & Co., will have to merge in order to stay competitive.

“This will push Wells and First Interstate right into each other’s arms,� predicted Stephen McLin, a former BankAmerica executive vice president, echoing a commonly held feeling among investors. In fact, First Interstate’s stock soared 22% Monday on expectations that it will be bought.

Monday’s announcement was a particular shock, because while many experts expected a major merger in California banking, the conventional wisdom was that Wells Fargo and Security Pacific would be the partners. Talks between the two collapsed last year.

Meanwhile, some analysts said an expanded BankAmerica would rival and perhaps even eclipse Citicorp as the nation’s largest and most important financial institution. It would also turn BankAmerica into a powerhouse in the Pacific Rim, they said.

The merger is another example of a continuing consolidation of the U.S. banking system that has been going on for several years and is expected to last several more, banking analysts believe. It comes at a time when Congress is considering major bank reform to make U.S. banks more competitive with financial services firms and huge foreign institutions.

The U.S. banking system today has far too many branch offices and far too little capital, a financial institution’s cushion against losses. U.S. banks have been particularly hard hit in recent years by bad international and commercial real estate loans on which borrowers have quit making payments. The recession has also taken a toll on their profitability.

Just last month, Manufacturers Hanover and Chemical Banking, two financial behemoths in New York, announced a plan to merge that is expected to reduce overhead by about $650 million a year and eliminate more than 6,000 jobs. That was followed by the proposed union of NCNB and C&S;/Sovran to create a super-regional bank based in the Southeast. That merger would also cause thousands of layoffs through the consolidation of duplicate operations.

“There are a lot of factors driving these mergers,� said Richard A. Mueller, an analyst for Duff & Phelps & Co. in Chicago. “There is a changing competitive and regulatory environment. There is a lot of overcapacity and the banks are trying to consolidate.�

He added: “The banks are trying to reduce costs and operate more efficiently and still service the same markets.�

“There’s a real simplicity in this,� added Robert Dugger, chief economist for the American Bankers Assn. in Washington. “What’s pushing this are cost pressures and profit pressures, pure and simple. You combine these banks and they’re going to be far more competitive in the United States.�

If BankAmerica and Security Pacific unite, the new bank would have $190 billion in assets, second only to Citicorp with $217 billion. Yet, BankAmerica could easily surpass its New York rival in the months ahead because Citibank is struggling now and shrinking its assets.

“This is going to put a lot of pressure on Citibank,� said Walter Baumann, analyst for Nikko Securities International in New York. “Bank of America is going to be a close second now.�

The merger also signals that BankAmerica plans once again to become a world banking power, a position from which it retrenched in the 1980s when loan problems forced it to curtail operations sharply overseas.

The proposed merger looks particularly formidable in the Pacific Rim, from Japan to Australia. “Both banks have operations in the Far East,� Dugger said. “By combining them, they become a significant player in all the major financial centers there.�

Experts say the recent spate of merger announcements partly reflects a changed environment in Washington, where regulators are now pushing commercial banks hard to be more profitable and efficient.

“The business climate has clearly changed,� said McLin, who now runs a savings and loan company. “Before they were worried about the concentration of resources.�

If Wells Fargo and First Interstate were to merge, it would create the nation’s fifth-largest bank. Wells has more than $56 billion in assets, while First Interstate has more than $51 billion.

However, both banks have had loan problems in recent years, raising questions about whether such a merger would ever be allowed. One Los Angeles banking lawyer, who declined to be identified by name, predicted flatly that regulators would never agree to such a union.

Wells’ profit in the first half of 1991 was off sharply from last year, while First Interstate lost nearly $21 million.

Monday, Wells Fargo’s stock closed up $3.25 to $75.50, while First Interstate closed at $33.875, up $6.125.

A Wells Fargo spokeswoman declined comment on the merger speculation, though she said the bank has been extremely aggressive in acquisitions in recent years, going back to 1986 when Wells gobbled up Crocker National, a major competitor.

She also noted that Wells Fargo acquired all or part of five California financial institutions in 1990.

First Interstate also declined comment, while playing down the importance of the BankAmerica announcement. “We already successfully compete with both banks in a number of markets,� said Simon Barker-Benfield, a First Interstate spokesman. “The main difference we see is that we will now be competing with one name instead of two.�

Though many in the California banking world were reeling from Monday’s announcement, there was calm at the First National Bank of Marin, a tiny financial institution with $32 million in assets that caters to high-income customers.

Bank Chairman Alvin Rice, another former B of A executive, said the merger may lead to the closure of branches in Marin County, where both BankAmerica and Security Pacific have a high concentration of offices. “We’ll probably get some business from this,� Rice said.