A prominent mortgage banking analyst says the major California thrifts have finally turned the corner "and are about to emerge from a long winter of lackluster investment performance."

The thrifts had been bedeviled by one of the worst regional price declines in recent history that has brought with it protracted credit losses on home mortgages, says Jonathan Gray of Sanford C. Bernstein & Co., New York.

And on top of that, they suffered from sparse demand for adjustable-rate mortgages through 1992 and 1993, with interest rates at the lowest in a generation, he says.

With net interest margins on COFI loans depressed, the first quarter of this year has been tough as well. But now, Mr. Gray believes, the forecast is for significant improvements.

"Return on assets at Ahmanson and Great Western is benefiting from a sharp decline in total credit costs as the brunt of the California housing recession appears to be behind them," he wrote in a recent report, "with default frequency declining and loss severity per default abating."

He also points to strong demand for loans pegged to the COFI rate, which provided brisk growth in 1994. But he sees loan growth as restrained for Great Western and Ahmanson, "who will probably sell an increasing fraction of their origination volume in a mortgage banking mode." He said he believes the two thrifts are not accumulating capital fast enough to support growth of more than 5% to 7%.

"By contrast, Golden West has a much higher return on assets and equity reinvestment rate, and can finance loan growth of 16% this year and 13% next, and still buy back some 5% of its outstanding shares."

He expects that demand for adjustable-rate mortgages will decline as their indexes rise and the gap between short and long-term rates shrinks.

"All three have resorted to paying mortgage bankers fees to originate COFI ARMs on their behalf, which has meant a sacrifice of some spread to achieve the incremental volume growth."

Mr. Gray says the principal risk to his forecast for improved profits for the three thrifts would be a new acceleration in the growth of the domestic economy. He believes this would result in a tightening by the Fed greater than the 100 basis points in his scenario. But he believes earnings will be fairly sturdy and growth would not be preempted unless the tightening tops 200 basis points.

On the upside, Mr. Gray says that a sluggish economy that would require no tightening - rather than the 100 basis points in his base forecast - then earnings per share for Ahmanson could be $2.50 a share instead of a base $2.20; for Great Western, $2.40 instead of $2.20; and for Golden West, $4.85 instead of $4.45.

He concludes that all three companies are moderately undervalued. He believes investors may begin to value the companies based on stable interest rates.

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