BankAmerica plan to slash jobs calls expansion into question.

SAN FRANCISCO -- BankAmerica Corp.'s recent decision to adopt a tough austerity program casts a shadow on its ambitious expansion drive.

To explain its move to chop costs by 4% and cut up to 3,750 jobs by yearend 1994, the nation's second-largest bank company cited weak revenue and financial performance below the level of other major banks.

Bank officials attributed those results to poor business conditions and soft customer demand, especially in BankAmerica's home state of California.

Acquisition Program Cited

But analysts say the San Francisco-based company cannot pin its lackluster results entirely on a feeble economy. They say the roots of BankAmerica's subpar performance lie, at least in part, in its acquisition program.

BankAmerica "is clearly bigger, but it is not clear they are better," said Lawrence R. Vitale, analyst with Bear, Stearns & Co.

Over the last three years, BankAmerica has carried out the largest merger in U.S banking history -- the 1992 takeover of Security Pacific Corp. -- and a series of smaller acquisitions that extended its branch banking network from two Western states to 10. Its size nearly doubled.

Few question the long-term benefits. "They created one of the best franchises in banking," said J. Richard Fredericks, analyst at Montgomery Securities.

But the financial rewards of expansion have yet to materialize. That's because the goodwill from the Security Pacific acquisition steadily drains earnings.

Anemic Returns

"They paid $4 billion and then took $4 billion in goodwill," said Campbell K. Chaney, bank analyst at Dakin Securities, San Francisco.

In addition, BankAmerica's new banking subsidiaries generate anemic returns.

As a result, BankAmerica's rates of return and earnings-per-share have been essentially flat at a time when most major banks are seeing profits soar.

For the first nine months of 1993, BankAmerica posted only a fair 1.05% return on assets. Without the dilutive effect of acquisitions, BankAmerica would have registered a robust ROA of about 1.35% to 1.40%, analysts estimate.

These results raise a fundamental question: To what extent should shareholders be asked to sacrifice current gains for future benefits?

At stake, analysts say, is whether BankAmerica chairman and chief executive Richard M. Rosenberg will ultimately be seen as a visionary or an empire builder.

Mr. Rosenberg has been the driving force behind the expansion, which he believes has positioned the company to thrive in an emerging era of nationwide banking.

For their part, BankAmerica officials forcefully defend their expansion strategy.

"It's a longer build than three years," said vice chairman Lewis W. Coleman in an interview. "We're taking a longer-range view than the market takes."

Mr. Coleman stressed that BankAmerica has made itself the dominant banking organization in the West, with strong market positions in most states in the region.

But the BankAmerica executive conceded that acquisitions may have handicapped current earnings.

Expansion dilutes BankAmerica's earnings in several ways. Every quarter, BankAmerica takes $100 million out of current income to amortize goodwill created in the Security Pacific acquisition.

Analysts estimate that the company also pays roughly $30 million in dividends for preferred stock issued to help finance the merger.

Meanwhile, the subpar returns of the new banking units also dilute companywide performance.

BankAmerica cobbled together these subsidiaries mainly by buying failed thrifts from the federal government.

"They bought branches, deposits, and overhead with few loans," said Mr. Vitale.

"That may have more to do with their revenue problems than anything else."

BankAmerica faced a choice of paying relatively cheap prices for thrifts or making much bigger investments in healthy commercial banks, Mr. Coleman noted.

"In Arizona," he said, "we could have gotten in a bidding war with Banc One Corp. for Valley National," the state's largest bank.

Mr. Coleman contended it was ultimately less expensive to "start with a small investment ... and build a franchise from the ground up."

Some analysts accept that reasoning.

For example, BankAmerica's Texas unit lost a whopping $40 million in the first half of 1993.

But expansion into the Lone Star State "brought them into a huge banking market where the potential is terrific," said PaineWebber analyst Lawrence W. Cohn.

"This is a market where they belong."

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