LOS ANGELES California's vulnerability to the international economic slowdown has not cooled the newfound aggressiveness of its midsize banks in international operations.

Though the economic turmoil abroad has taken a toll, demand has not disappeared for the state's output of high-tech computer and telecommunications equipment, media and entertainment products, and prefabricated housing.

The bankers have geared up in recent years to support their business customers' international requirements. And the smaller and more specialized companies that make up the bulk of midsize institutions' customers have been less affected than the big multinational companies by the sharp drop in exports to Asia.

Bankers added that even if exports to Asia are down, trade with Canada, Mexico, and Europe is still up.

For smaller banks, the big discovery of the last few years has been just how profitable trade-related international business can be. Trade-related commitments have capital requirements of as little as 2% because regulators consider them extremely safe.

As a result "the return on equity is astronomical," said Peter Knudson, senior vice president for international banking at Imperial Bank in Redondo Beach. It can go as high as 50%.

"When I joined Imperial seven years ago the bank was doing less than $400,000 worth of international business a year," Mr. Knudson said. "Today I'd be disappointed if we didn't do at least $1 million a month."

At Beverly Hills-based City National Corp., noninterest income from international operations climbed to $7.3 million last year from $4 million in 1995.

"The number of middle-market players in need of international assistance has increased dramatically," said Robert S. Krant, senior vice president. "The payback on our investment has been very quick."

Noninterest income from trade-related services at one of the state's larger banks, Sanwa Bank of California, rose to $7.74 million in 1997 from $6 million in 1996 and $5.4 million in 1995.

At Comerica Bank-California of San Jose, a unit of Detroit-based Comerica Inc., trade-related revenues have jumped 35% annually since it began an expansion of international activities three years ago.

To be sure, bankers acknowledged that the sharp drop in trade with Asia will probably slow growth in 1999.

"If you're only financing exports to Pacific Rim countries, your business is going to be way down," said Henry J. Jurgens, senior vice president for international banking at Sanwa in Los Angeles.

Overall exports from California were virtually unchanged during the first six months of 1998, at around $52 billion, according to data compiled by the University of California at Los Angeles.

Though exports to South Korea, Thailand, and the Philippines fell by 20% to 40%, they were up by 22% to Mexico, 13% to Canada, 24% to Australia, and 29% to China.

The Commerce Department's report this month that the U.S. trade deficit slipped to $14.2 billion in October from $14.4 billion in September was seen as a strong positive export indicator. Exports were up 2.8%, imports 2.2%.

"Some of the (Asian) countries that were down and out are coming back faster than expected," Mr. Jurgens said. "The pendulum is starting to swing back, and now is the time to get into this business."

The midsize banks' matter-of-fact approach to international business is a far cry from the environment of past years when the biggest banks rushed overseas and to Latin America.

"People don't want off-the-shelf products rammed down their throats," said Glen L. Colville, first vice president and regional manager at Comerica Bank-California. "They don't want to be told: do business our way or you don't do it at all."

Bankers at the midsize institutions said their close customer relationships allow for hand-holding that big banks might find difficult to match in their market.

"You don't need to be a consultant to Boeing," Mr. Jurgens said. ''You do need to be a consultant to ABC Widget Company."

These Californians added that the uncertainty created by big mergers helped bring them customers and staff from First Interstate Bancorp, BankAmerica Corp., and Wells Fargo & Co.

"When you talk about bank consolidation, I love it," said Mr. Knudson. "We're one of the prime beneficiaries."

Robert Flores, head of a Geneva, Wis., recruiting firm, pointed out that the growth in international services from local banks in California reflects a broader trend.

"Larger banks have not serviced the middle market and lower end of the middle market," he said. "And smaller banks haven't had the infrastructure to address the international needs of those customers. What we're seeing are smaller banks, even community banks, ratcheting up to meet the needs of their customers."

Bankers also acknowledged that international activities are increasingly a necessity if they want to keep their customers.

"At a certain point in the life cycle of the companies we deal with, they get to a point where they want to export," said Lawrence D. Fountain, senior vice president for international operations at Silicon Valley Bank in Santa Clara.

Five years ago, he said, Silicon Valley decided it had to "either get into the business itself or pass it on to another bank." Since then, Mr. Fountain said, international business has become the single biggest contributor to the bank's fee income.

After getting in, the bank discovered another profitable international sideline: helping funnel a growing volume of Taiwanese venture capital investments into high-tech companies.

While these California banks are relative newcomers to international finance, most of their executives running overseas operations are veterans in the field. Using techniques learned earlier at larger banks, they are building "private label" correspondent services and handling letters of credit, foreign exchange, and collections for smaller community banks that are also experiencing surging demand for trade-related business.

SwifTrade, a recently launched Internet-based system for issuing and tracking letters of credit on-line, will allow Imperial to expand further, Mr. Knudson said.

But even amid such optimism, bankers caution that it can take years to build a solid trade-related banking business.

"You don't learn trade finance from a book," said Michael Tun Zan, chairman, president, and chief executive officer of Pacific Bank, a $700 million-asset institution based in San Francisco, which draws 35% of its income from trade finance. "You learn it from experience."

Bankers noted that given the time it takes to acquire expertise and put an infrastructure in place, trade banking is not a business companies can jump in and out of.

"If you leave a market during hard times, you'll find it very difficult to get back in when the good times come back," said Mr. Colville.

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