WASHINGTON - A leading thrift analyst is predicting that interest income at the large California thrifts will grow significantly once short-term rates peak.
As interest margins expand, income from the adjustable-rate mortgages that the thrifts made last year and this year, will also increase, according to Bruce Harting of Salomon Brothers Inc.
With the decrease in nonperforming loans and improving capital ratios, the higher interest income makes several of these thrifts attractive investments, Mr. Harting wrote in a recent report.
When interest rates rose last year, consumers shifted from fixed-rate to adjustable-rate mortgages. At the same time, total mortgage originations fell by a third as the refinance boom dried up.
For the large California thrifts, this combination of events proved favorable. It allowed them to replenish their portfolios, which had lost loans during the refinance boom, with new adjustable-rate loans.
For the first time in almost five years, assets at the California S&Ls grew, Mr. Harting wrote.
Assets at eight leading California thrifts grew almost 5%, to $174.7 billion, in 1994 from the previous year.
The thrifts include H.F. Ahmanson, Great Western, Golden West, California Federal Savings, Coast Savings Financial, First Federal Financial, Glendale Federal, and San Francisco Federal Corp.
But "the benefit of this growth will not be felt until later this year or even in 1996, when the interest rates for the new loans fully adjust upward," Mr. Harting wrote.
Most of the ARM loans made by California thrifts are linked to the 11th district cost-of-funds index, which traces the average cost of funds for thrifts in California, Arizona, and Nevada.
The index lags behind the actual cost of funds at the thrifts by about two months. With the Cofi index going up about 0.2% each month, that lag is worth about 0.4%.
Mr. Harting argues that once the Federal Reserve stops raising short- term rates, and the cost of funds at thrifts stabilizes, it will take two months for the thrifts to add that additional 0.4% to their margins.
That will allow the income on these loans to rise, Mr. Harting said.
