Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, March 24, 1992 TAG: 9203240126
SECTION: BUSINESS PAGE: A-5 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
The 7-0 ruling from the Fed is the last major regulatory obstacle to the deal, which would create a bank with $192 billion in assets and hundreds of branches scattered across 10 Western states and Hawaii.
Last month, to meet concerns raised by the Justice Department, the combined bank agreed to sell 213 branches in five states: Washington, California, Arizona, Nevada, and Oregon. The new holding company will retain the BankAmerica name.
After the deal is finished, the new bank would rank second only to Citicorp, which has about $217 billion in assets but is struggling. BankAmerica is still eyeing acquisitions and eventually could regain its lost status as the nation's largest bank.
Ranked by deposits, it will be the largest bank in California, Washington and Nevada, second-largest in Arizona and third-largest in Oregon.
BankAmerica, headquartered in San Francisco, currently is the third-largest bank-holding company in the country. The Los Angeles-based Security Pacific is the seventh-largest.
The merger comes at a time when an increasing number of analysts and academics are questioning whether bigger is really better.
It is the third of three mega-deals announced last year. The other two received federal approval in December. NCNB Corp. and Virginia-based C&S-Sovran Corp. combined to form NationsBank of Charlotte, N.C., with branches stretching from El Paso, Texas, to Miami to Baltimore. And Chemical Banking Corp. took over Manufacturers Hanover Corp. to create a New York-based colossus.
Security Pacific has been particularly hard hit by a downturn in Southern California commercial real estate. Security Pacific lost $765 million last year, compared with a profit of $161 million in 1990. BankAmerica earned $1.12 billion in 1991 and $1.11 billion in 1990.
Executives of the combined bank expect to save $1.2 billion a year, in part by eliminating 12,000 jobs over three years.
But analysts say achieving savings and, more importantly, hanging on to customers, will not be as simple as it appears on paper.
"You're talking about two huge complex financial institutions that have their own deeply embedded cultures. It's going to be extremely tough to achieve those savings," said William C. Ferguson, an Irving, Texas, banking consultant.
"That's not to say Bank of America can't do it. Maybe they can, but historically it just hasn't come about in many cases," he said.
Several studies - including one by two economists at the Federal Reserve Bank of Minneapolis and another by two professors at Harvard Business School - suggest that the theoretical benefits of mergers are not always realized.
The Harvard study looked at three New England mergers and found that the banks' profitability declined a year after the merger, while their competitors' performance improved.
The Fed study concludes that "after banks reach a fairly modest size, there is no cost advantage to further expansion. Some evidence even suggests diseconomies of scale for the very largest banks."
That seems borne out by the banking industry's performance in 1991. A key measure of performance, return on assets, got better as banks got smaller. The return on assets for the nation's 49 largest banks, all with more than $10 billion in assets, was 0.37 percent. The return was 0.78 percent for banks with assets between $100 million and $1 billion and 0.79 percent for banks smaller than $100 million.
However, merger advocates say there are benefits that take time to emerge. Mergers are about the only way, short of a failure paid for by the government, to weed out weak banks and improve the efficiency of the banking system, they argue.
Merged banks with overlapping markets can close branches and, in all mergers, savings can be realized by combining such support services as computer processing, advertising and auditing.
More importantly, Federal Reserve Vice Chairman David Mullins said, combining banks from two or more regions can result in a more stable bank, able to withstand regional economic difficulties such as the mid-1980s oil industry crunch in Texas.
Mullins said if a merger creates a combined bank that is better managed, it could help fix a root cause of banking's current problems - too much money chasing too few good loans.
by CNB