The prospective merger of two top Japanese banks has created some uncertainty for Union Bank of California in the midst of the bank's spirited recovery from real estate problems.
Union Bank is 72% owned by Bank of Tokyo Ltd., which said last week that it is combining with Mitsubishi Bank, owner of Bank of California, in a deal that will create the world's largest banking company.
"I have trouble imagining why they would not merge their two California subsidiaries. But, given that they represent only 3% of the combined company, it may not be surprising that we haven't heard yet," said analyst Sally Pope Davis of Goldman, Sachs & Co., New York.
Ms. Davis last week initiated coverage of Union Bank with a "moderate outperform" rating, based on the San Francisco company's strong fourth quarter and its good earnings prospects this year.
"Our estimates are $4.25 per share for 1995 and $4.60 for 1996, a dramatic earnings recovery from the $1.80 Union Bank earned in 1994," Ms. Davis said.
The good news comes after four years of depressed results as the bank struggled to cope with California's deep and protracted recession and its impact on the company's real estate portfolio.
That battle appears won after a large asset disposition program last year that chopped nonperforming assets to 1.43% at yearend from 6% a year earlier.
With earnings momentum in place, Ms. Davis feels there is upside potential in the shares, which have already performed well this year. Her 12-month price target is $40. The stock was off 75 cents to $33.75 on Monday afternoon.
"There is no question that 1995 will be the best year for Union in several years," agreed analyst Lawrence Vitale of Bear, Stearns & Co., New York. "But there are also quite a few things up in the air right now."
A merger of Union Bank and Bank of California, also based in San Francisco, would form the fourth-largest bank in California, behind Bank of America, Wells Fargo Bank, and First Interstate Bank.
With little overlap in their branch networks or business focus, a merger of the two banks would mean "additional market reach and depth while providing some opportunity for cost savings at the staff level," Ms. Davis said.
Other analysts view a merger of the subsidiaries as less likely. "The parent companies may want to maximize their return by selling one of them," said James Marks of Hancock Institutional Equity Service.
But he agreed with Ms. Davis that it was unlikely, in the event of a merger of the California banks, that the new parent company would buy the 8.2 million shares that are now traded publicly.
In fact, the sparse float in the shares traded has likely dampened further investor interest in the shares, many analysts believe.
At yearend, Union Bank listed only 2,011 shareholders of record. The average daily trading volume in the first two months of the year was 27,500 shares.
In other bank stock news, analyst Frank J. Barkocy of Advest Inc. on Monday initiated coverage of Bank of Boston Corp. with a "buy" rating.
The bank has a "broadly diversified business mix and earnings stream," he said, while its stock currently trades at only 7.2 times his 1995 earnings estimate of $4.10 per share. Similar banks trade around nine times expected earnings.
Mr. Barkocy thinks Bank of Boston shares should provide investors with a total return "in excess of 20% over the next 12 months." The stock was off 25 cents to $29.625 on Monday afternoon.
