Executives of California's big thrifts should be smiling these days. They've been grabbing market share away from their archrivals, the mortgage banks, at a rapid rate. Credit losses have shrunk. Housing prices have stabilized, and construction activity has surged in otherwise bedraggled Orange County as well as in other parts of the state.
There's just one little problem: margin compression.
Two securities analysts have put out reports in the last few days with cautious earnings estimates for the West Coast thrifts, and for identical reasons: the competitive binge that has squeezed the profits out of originations of adjustable-rate mortgages.
The two analysts are Jonathan Gray of Sanford C. Bernstein & Co. and Tom O'Donnell of Smith Barney Inc.
Mr. Gray has been gradually trimming his earnings estimates in recent months and is now calling the consensus estimates on Wall Street much too high.
"The major California S&Ls are seeing the long-awaited EPS recovery from the California housing recession severely blunted by pressure on net interest margins," he wrote in his report this week.
The compression "derives primarily from a two-month repricing lag on COFI ARMs, so that the faster funding costs rise, the more spreads are squeezed, as well as the elimination of floor income on these ARMs," he said.
He added that the repricing lag was likely to be most negative from October to June because deposit pricing is rapidly catching up to money- market mutual funds and open market rates.
Despite his lowball estimates, Mr. Gray is not totally negative on the industry.
Earnings per share "should stage a modest recovery on a sequential quarterly basis" after the first quarter of this year, he says, even assuming further rises in the federal funds rate of 50 basis points this year and 100 next year.
In particular, he says H.F. Ahmanson & Co., Irwindale, and Great Western Financial Corp., Chatsworth, are making dramatic reductions in credit losses.
At Smith Barney, Tom O'Donnell said he was cutting earnings estimates for Ahmanson, parent of Home Savings; Great Western; and Glendale-based Golden West Financial Corp., parent of World Savings.
He is slashing Ahmanson by 23%, to $1.85 from $2.40; Great Western by 15%, to $1.70 from $2; and Golden West by 13%, to $3.60 from $4.15.
"Pricing pressures seem to be strong," he said, "and 1995 will be a tough year." But he adds that the earnings weakness for this year has probably already been discounted in the stock prices.
Mr. O'Donnell expects prices to recover once the market starts pricing on the basis of 1996 earnings, which should occur later in the second half. He expects earnings per share to rebound for all three companies, climbing solidly above last year's levels.
Mr. Gray is also fairly sanguine about 1996 earnings for the companies. He sees a rebound to $2.40 a share by Ahmanson, while Mr. O'Donnell expects $2.65. For Great Western, their numbers are $2.30 and $2.50, respectively, and for Golden West, $4.55 and $4.20.
