Michael Shepherd, Bank of the West's chief executive and president, did not downplay the impact of credit deterioration on its second-quarter results, but he said the current environment presents consolidation opportunities.
"Our core franchise is performing very well," Mr. Shepherd said Wednesday, the day his BNP Paribas SA unit reported earnings bruised by soured loans to home builders and the weak California housing market. "We're certainly experiencing a flight to quality" as customers flee weakened competitors.
He also said his bank and others that are well capitalized should be poised to ramp up profits and make acquisitions.
"There will be a period of some consolidation in the next few years," Mr. Shepherd said. "We see a real opportunity to grow market share organically, but also through acquisitions. … We certainly are benefiting from our strong financial position."
The $63.3 billion-asset San Francisco bank will be "an opportunistic" acquirer, he said. A major acquisition is not currently on his agenda, but "it's certainly possible."
Bank of the West said its second-quarter earnings fell 73% from a year earlier, to $37.2 million. Its provision for loan losses rose 47%, to $185.3 million, and it took a $27.9 million impairment against securities losses.
Mr. Shepherd cited "unusually deep deterioration" of housing prices in markets east of Los Angeles, as well as in the Sacramento and Stockton markets.
Deposits rose 3.5%, to $37 billion. Total loans and leases rose 11.4%, to $45.3 billion, as a result of strength in consumer, small-business, and agriculture lending, the bank said.
Its net interest margin rose 16 basis points, to 3.31%.
As of June 30 its Tier 1 capital ratio was 9.14%, well above the 6% target set by regulators. "Capital is not at all" a problem, Mr. Shepherd said.
"The fundamental base business continues to be strong, but the credit costs overshadow that," he said. However, Bank of the West's credit provisioning was "well in excess" of its $110 million of second-quarter chargeoffs and will provide a buffer against further troubles in its builder portfolio.
Mr. Shepherd said he did not expect a long hangover from the bursting of the housing bubble, and that the credit cycle should start to improve next year. Employment data is an important gauge of customers' ability to pay off loans, he said.
He cited what he called an encouraging report released Wednesday by Automatic Data Processing and Macroeconomic Advisers, which said private-sector jobs increased by 9,000 this month — much better than the average forecast of a 65,000 drop by economists polled by Dow Jones.
Unlike the Labor Department's official payroll report, which will be released Friday, the ADP-Macroeconomic Advisers report does not account for government jobs. Public-sector jobs rose by 29,000 last month, according to the Labor Department.
"If employment remains pretty strong, it will bode well for credit quality and recovery of the banks," Mr. Shepherd said.
Sung Won Sohn, an economist at California State University, Los Angeles and a former bank executive, took a less optimistic view of the sector. In an interview Wednesday, he said it likely will spend the rest of this year "in a very painful deleveraging process" that will inevitably lead to more failures, along with further loan losses and asset deterioration, even for the strong companies.
"I think the economy is in a recession, despite what GDP shows," Mr. Sohn said. "I think we're near the worst of it, but I think things will deteriorate further before they get better."
He also said he expects conditions to stabilize early next year and improve in the second half of next year. "During all this, at some point there will be consolidation, and the survivors, the strong ones, will benefit."
Timothy O'Brien, an analyst in San Francisco for Sandler O'Neill & Partners LP, said in an interview that, anecdotally, sales of foreclosed homes appear to be picking up in hard-hit markets such as Sacramento.
"This is a positive sign that banks are starting to bring their inventories to market and achieve some sales," he said. "That could be a sign of some stability."
Banks with troubled real estate loans in California should watch employment data closely at the state level, Mr. O'Brien said. He noted that the state's unemployment rate rose 10 basis points last month from May, to a seasonally adjusted 6.9%. It was 5.2% a year earlier.
Until unemployment levels come down, many consumers will remain leery about investing in homes, he said, and others will not have the means to secure financing. "So I don't think it's clear yet when we'll see lasting stability" in the California housing market.
BNP Paribas will release its quarterly earnings report Aug. 6. The report will include results for BancWest Corp., the holding company for Bank of the West and First Hawaiian Bank.
