Following the recent wave of consolidation of the home equity industry, just two companies remain as contenders for the role of the largest independent consumer finance company: Household International and Associates First Capital Corp.

The megalenders topped the charts of nonbank home equity lenders. Associates made $8.86 billion in home equity loans in 1998, according to American Banker data, while Household made $6.96 billion.

With many of their former competitors in a distressed state or eliminated from the lending landscape, the two stand to gain considerable market share. Both are focusing on streamlining operations, though to different extents. The success of their strategies may determine which company leads the list of nonbank home equity lenders in coming years, analysts say.

Dallas-based Associates leads Household in worldwide branch presence, with just over 2,500 at yearend, against Household's 1,650 as of May 1999. The Texas lender beat out Household in net income last year, with $1.22 billion to Household's $524.1 million. Household's results, however, were affected by a $1 billion one-time charge the company took related to the Beneficial acquisition.

Household, based in Prospect Heights, Ill., is making a serious play to beat out its consumer finance rival, analysts say. Household has managed to successfully integrate the purchase of Beneficial Corp. that it closed last year, and is reaping the rewards.

The Illinois' lender's $43.51 billion consumer loan portfolio topped Associates' $40.7 billion at yearend.

Analysts say they are cheered by Household's centralized home equity operations-the company has converted Beneficial's offices to its business model. Branch employees who once had to underwrite and service loans can now concentrate on the business of selling, said a Household spokesman.

"Household's expertise lies in its ability to rationalize a bloated cost structure and streamline operations," said Moshe Orenbuch, an analyst with Donaldson, Lufkin & Jenrette, in an April 27 report initiating coverage of the company with a "buy."

"In today's industry environment, with relatively slow overall growth," Household's "efficiency skills are even more valuable," said Mr. Orenbuch. Meanwhile, Household's core business growth continues strong. The company currently sells at a 35% discount to its peers, Mr. Orenbuch noted.

"With the integration of Beneficial and HFC branch networks behind us, our consumer finance business has begun to realize the full benefits of the merger, while ... capitalizing on the improved home equity lending environment," said William Aldinger, Household's chief executive, when the company reported first-quarter results in April.

"We have great momentum in this business," he said.

Associates, meanwhile, still maintains a relatively decentralized strategy. But the company announced early this year that it, too, is looking to centralize some operations. Associates will create a three- tiered structure. Branch personnel in smaller markets, where customers prefer hands-on customer services, will continue to underwrite, service, and collect loans.

In midsize markets, where customers tend to prefer speed and convenience, those functions will be handled at centralized locations, though other products will be offered in addition to home equity loans. In heavily populated areas, which have been targeted for high growth, the company will offer only home equity loans, through branch employees who are solely salespeople.

"Basically, they're insuring themselves growth down the road," said Joel J. Houck, an A.G. Edwards analyst. "They're streamlining and fine-tuning their model," he said.

Associates closed a sizable acquisition with January's purchase of Avco Financial Corp. The deal netted Associates 400 offices and 2,100 employees.

Keith Hughes, chief executive, said in the company's first-quarter earnings announcement that the company was already seeing the benefits of this acquisition.

"We are confident that 1999 will see another year of reliable, consistent results at The Associates," he said.

There is no "one right mode" for conducting a home equity operation, Mr. Houck noted. "It depends on what works for the company."

So far, the outcome of the Household-Associates race is anyone's guess, analysts say.

"Their stories are a little different at this point," said Mr. Houck. "Household is much further along with the Beneficial acquisition. Associates is seeing some improvements with Avco, but the company is still integrating," he said.

"We're waiting to see what the second quarter looks like," Mr. Houck added.

Associates is also differentiated from Household by its involvement in commercial finance. About one-third of the Texas lender's profits come from its commercial operations, while Household is purely a consumer lender.

Associates' differentiation may give it more earnings stability, noted Mr. Houck. In addition, the company has used purchase accounting for all its acquisitions, which is viewed more favorably by investors that the pooling method that Household favors.

Investors believe purchase accounting yields "higher quality" earnings, he said.

"That's why Associates carries a higher multiple on its earnings" than Household, Mr. Houck said.

Household, though, is a huge player in the Visa and Mastercard credit markets, Mr. Houck said.

Advanta Corp., the third-largest independent nonbank home equity lender, is still much smaller than either of the two giants, Mr. Houck said, and does not have the same diverse product mix.

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