Banks Benefit As Arizona Shines Again

As the national economy continues to sputter along, Arizona appears well on its way to a recovery.

After four years of decline, housing starts are expected to rise 4.6% for the year, according to Arizona Blue Chip Economic Forecast, published by Arizona State University, Tempe. The state's work force is expected to grow by 2.5% this year, compared with zero growth nationally.

"Arizona is now more of a bright spot than a black hole," said Terry Gilbert, managing partner at Kenneth Leventhal & Co.'s Phoenix office.

The outlook for Arizona banks also is improving. At Valley National Corp. and First Interstate Bancorp's Arizona unit, the state's two biggest banks, nonperforming assets have declined for five consecutive quarters, although they remain at relatively high levels.

Big Improvement for Valley

Valley earned $10.4 million in the first six months of 1991, four times what it earned in the period a year earlier, even when one-time gains from restructuring the securities portfolio are subtracted. Valley's debt rating was upgraded recently to Ba3 from B2 by Moody's Investor Service.

First Interstate's Arizona unit earned $17.1 million in the first six months, compared with a loss of $3.4 million in the first six months of 1990.

Similarly, Security Pacific Corp. executives have said the company's Arizona unit has mended and will begin contributing earnings.

Some Problems Lurking

The Grand Canyon State could still experience some setbacks. In June, America West Airlines, the state's largest private employer with 9,000 workers, filed for protection from creditors under Chapter 11 of the federal bankruptcy code. "Most people think they will have to do some restructuring, but they won't disappear," said one economist.

Likewise, the merger of Bank-America and Security Pacific will likely lead to layoffs at their respective Arizona units, which together employ 5,460 people.

The biggest problem for Arizona is vacant office and retail space. That puts a damper on construction employment, which is an important engine in the Arizona economy.

The metropolitan Phoenix office vacancy rate is hovering around 26% and so far hasn't declined. And even though construction of new offices ground to a halt, experts said it will be three to five years before any meaningful amount of space is filled.

"We have a long way to go," said Mr. Gilbert at Kenneth Leventhal. "But the demand is starting to gain on supply."

Many are optimistic that the sobering downturn experienced in recent years will take the edge off Arizona's historical boom and bust cycles. "The business cycles will be less traumatic," said Richard Lehmann, chairman and chief executive of Valley National Corp.

But even if it doesn't, Leventhal's Mr. Gilbert notes: "There is a lot of time and a lot of upside before the next bust."

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