Analysts say some banks, S&Ls are undervalued: Wall Street is reacting to depreciating values bank east.

Analysts say some banks, S&Ls are undervalued 

Wall Street is reacting to depreciating values back east

With financial stocks hitting new lows last week -- First Interstate, CalFed Inc., Bank of America, Wells Fargo, and Great Western Financial Corp. among them -- analysts are saying that banks and thrifts are getting a bum rap and that there may be steps they can take to minimize damage.

"A lot of the price decline is overreaction to what happened to real estate back east," said Tony Howard, an analyst with Crowell, Weedon & Co. of Los Angeles. "They experienced depreciation in their home markets and think it will occur in California."

Meanwhile, Los Angeles-based First Interstate Bancorp last week suspended an aspect of a dividend reinvestment program because of fears of further diluting the stock's value.

Many leading financial institutions were trading at or near their year lows and below book value.

As of Aug. 21, Imperial Bancorp, Los Angeles, was selling at 84 percent of book value, Independence Bank was selling at 91 percent, Los Angeles-based H.F. Ahmanson (Home Savings of America's holding company) at 79 percent, and Los Angeles-based Coast Savings at 32 percent, to name a few local institutions.

Howard said that while Crowell Weedon has predicted a real estate and general economic downturn for the next 12 months, the "bank stocks would make you think we were in a depression, not a recession."

For many companies, he said, he is advising investors to buy. "We think there are great opportunities in investing right now. He listed larger banks such as Wells Fargo, based in San Francisco, Security Pacific, based in Los Angeles, and First Interstate Bancorp and smaller banks Including Beverly Hills-based City National Bank and Guardian Bancorp as good buys.

Another banking expert was not as optimistic.

"Banks are under a tremendous squeeze and it's definitely impacting profits from a half dozen different directions which will definitely depress prices," said Sal Serrantino, president Santa Monica-based California Research Corp.

"There is very little good news," he said.

While financial stocks have been hurting for nearly a year, a series of bad news which began July 16 has led to the latest decline in prices, said an analyst who requested anonymity.

On July 16 Home Federal Bank of San Diego announced that its level of loan writeoffs would be higher than anticipated. Other negative events included commercial loan losses announced by CalFed and a First Interstate quarterly report that noted potential real estate problems in California, said the analyst.

In addition to real estate fears and the events listed above, Serrantino cited media coverage of bank and S&L failures, possible deposit insurance reform, the credit crunch, and concerns that war in the Persian Gulf will send interest rates soaring and the economy into a recession.

To make the best of a bad situation, analysts and financial experts suggested several steps, including:

* Focusing on a bank's core business. Many banks and thrifts are jettisoning unprofitable divisions. First Interstate sold it's consumer finance subsidiary in July and has sold off a Fort Collins, Colorado bank and has agreed to sell three New Mexico banks.

California Federal Bank has sold off its real estate development subsidiaries and its direct mail insurance system, and its property-casualty insurance business.

* Direct more resources to managing their real estate portfolios and real estate-related loans. "A tremendous amount of attention should be devoted to potential real estate problems," said Jim Bemowski, partner at McKinsey & Co.'s Los Angeles office.

Investors will increasingly evaluate financial institutions by which institutions experience fewer defaults and how skilled management is in recognizing potential problems and offering creative financing to serve salvageable loans - and by pulling out of loans promptly if default appears inevitable, he said.

* Management needs to demonstrate that it understands the problems and represent them correctly to investors and the media.

Some banks are trying to address investors face to face. Last week Security Pacific Bank CEO Robert Smith and Crowell Weedon representatives hosted an investment meeting for 30 local portfolio managers. "There was some interest in local financial stocks and in Security Pacific in particular," Howard said.

* Control costs. "All the major banks have made a very dramatic reduction in the maintenance of cost control," Serrantino said, noting the expansion of banking hours as a large cost which has resulted in little benefit to banks because of a lack of competitive advantage.

* Maintain a strong capital base. "There's an investor perception that banks aren't well-capitalized," said Ken Ackbarali, vice president and senior economist at First Interstate. Ackbarali noted that risk-adjusted capital standards required by federal regulators will rise to 7.25 percent by the end of 1990 and 8 percent by the end of 1992.