Analysts see better second quarter for L.A. financial institutions.

Analysts see better second quarter for L.A. financial institutions

Los Angeles County's largest banks and thrifts are likely to post higher second-quarter profits when final results are tabulated during the next two weeks.

Comparisons will be particularly dramatic at Security Pacific Corp. and First Interstate Bancorp, Los Angeles' two largest banking companies, securities analysts said last week. Both companies posted losses during 1987's second quarter after the companies together placed more than $1 billion into reserves for possible losses on foreign debt.

While 1988 is expected to be a rather ordinary year for banks and thrifts, the special reserves made 1987 so dismal that "in any case, comparisons are going to be a dandy," said Dan Williams, banking analyst with the San Francisco investment house of Sutro & Co.

Last year's write-offs, which were caused when some Latin American nations stopped paying interest on their foreign debt, are not likely year. Although Argentina, which is currently late on its debt payments, is "the thing to watch," added Livia Asher, banking analyst with Fox-Pitt Kelton Inc. in New York. Otherwise, she said, "this is going to be a pretty normal quarter."

Interest margins are "holding steady" and loan volume is stable, she said. Asher predicted that $58 billion (assets) First Interstate will earn $1.80 per share this quarter vs. a $10.00 loss during the same quarter a year ago. Security Pacific, with $73 billion in assets, will earn $1.35 per share vs. a $1.81 loss during 1987's second quarter, Asher said.

Williams said First Interstate's earnings could be even higher of one-time tax benefits resulting from last year's write-offs. First Interstate could earn as much as $2.20 per share, but as much as 40 cents of that amount would be attributable to tax breaks, Williams estimated.

City National Corp., the $3 billion (assets) parent of City National Banks of Beverly Hills, is likely to post a 27 percent quarterly profit increase to 52 cents per share vs. 41 cents per share a year ago, Williams said.

Imperial Bancorp., parent of Los Angeles' $2 billion (assets) Imperial Bank, will earn about 35 cents per share during the second quarter, up 17 percent from year-ago figures, said Asher.

And earnings at Lincoln Bancorp of Encino, parent of $300 million (assets) Lincoln National Bank, will rise 23 percent, said Williams. Second-quarter profits will reach some 27 cents per share vs. 22 cents at this time a year ago.

Little banks such as Lincoln are benefiting from rising interest rates, Williams said. Banks often profit from upticks in prime rate because the rate banks charge for loans immediately increases with a prime rate rise, while the rates banks pay for deposits lag behind.

When the prime jumps from 8.75 percent to 9 percent, for example, First Interstate and Security Pacific call commercial loan customers immediately to tell them that the interest rose that day. But the banks' main funding source is deposits which rarely rise as quickly as prime. As the difference between the banks cost of funds (deposits) and return on loans widens, it increases profits.

The effect of rising interest rates works in the exact opposite manner for savings and loans. Thrifts, which concentrate on 30-year home mortgages, base loan rates on indexes that rise and fall slowly. In times of rising rates, thrifts often find their profit margins squeezed.

Nevertheless, the city's largest thrifts are likely to post substantial second-quarter profit increases, thrift analysts said last week.

H.F. Ahmanson & Co., the $36 billion (assets) parent of Home Savings of America, will post the largest quarterly profit increase, said E. Gareth Plank, S&L analyst with Shearson Lehman Hutton Inc. in San Francisco.

Shearson expects Ahmanson to earn 60 cents per share during the second quarter, up 82 percent from per-share profits of 33 cents during the same quarter a year ago.

Great Western Financial Corp., the $29 billion (assets) parent of Great Western Bank, will post a 25 percent earnings increase, Plant said. Per-share profits will reach 50 cents during the second quarter vs. last year's second-quarter profits of 40 cents.

Los Angeles-based Coast Savings and Loan Association, $12 billion (assets), will pull down second-quarter profits of 80 cents per share, a 21 percent increase, Plank said.

While Plank forecasts a slight -- 5 percent -- profit increase at Lost Angeles-based CalFed Inc., the $24 billion (assets) parent of California Federal Savings and Loan Association, another analysts predicted that CalFed's earnings will fall.

"CalFed says they can beat last year's earnings, but I have a hard time believing that," said Jim Wilson, S&L analyst with Sutro & Co. in San Francisco.

CalFed was one of the few thrifts to post positive profit comparisons in 1987, Wilson noted. While most of the nation's largest thrifts reported pared 1987 profits as the result of accounting changes and special write-offs caused by the insolvency of an industry insurance fund, CalFed's 1987 profits broke previous records. The Los Angeles-based thrift benefited from an unusually low tax rate that will not be available this year, Wilson said.

Wilson predicts that CalFed's second quarter profits will fall by 8 percent to $1.38 per share vs. $1.50 per share.

However, Plank estimated the company's earnings will rise by 5 percent to $1.50 from $1.43 per share.

The difference in historic per-share profit figures is a result of how analysts calculate shares outstanding. Some use "fully diluted" numbers, which base per-share calculations on all shares, including those that are authorized but not yet issued. Others base per-share earnings solely on issued shares. Then, too, some S&Ls restated historic earnings figures to reflect changes in the way thrifts are allowed to report income from loan fees, which has further confused earnings comparisons.

"Usually the tough part of my job is projecting earnings," said Peter Treadway, a savings and loan analyst with Smith Barney, Harris Upham & Co. Inc. in New York. "But this year it is more difficult to figure out historic earnings. They're a moving target."

Glendale-based GlenFed Inc., the $23 billion (assets) parent of Glendale Federal Savings and Loan Association, will record a 15 percent drop in quarterly profits, said Plank.

The decrease is the result of GlenFed's purchase of Fresno-based Guarantee Financial Corp. in October of 1987, Plank said.

Financially ailing Gibraltar Financial Corp., with assets of $15 billion, could post a slim profit this year, said Wilson. But Plank predicted that the thrift would report a 10 cent per share loss during the second quarter as a result of loan losses. Gibraltar, which lost $135 million in 1987, posted a 47 cent per-share profit during the second quarter of 1987, Plank said.

Overall, S&L earnings are on the upswing, analysts said.

"Earnings comparisons will be positive this year," said Plank. "It appears that savings institution profits have hit bottom. Things are looking up from here on out."