SAN FRANCISCO — After struggling with credit quality problems and weak profits for the past year, Unionbancal Corp. is setting its sights on business lines, such as the trust and custody business, that executives hope will assist in a turnaround.

The decision, which followed a seven-month review, comes against the backdrop of the company’s second earnings warning this year.

Over the past three quarters San Francisco-based Unionbancal, which owns Union Bank of California and is mostly owned by Bank of Tokyo-Mitsubishi, has been dogged by credit quality problems, this year’s thorn in the side for the banking industry.

The latest warning cites net chargeoffs of $165 million to $185 million and nonperforming assets of $400 million to $450 million, reducing analysts’ predictions for fourth-quarter earnings by a hefty 79 cents per share. Unionbancal said it will just squeak into profitable territory with a gain of about 1 cent per share.

Wall Street had been expecting the company to clean house in the fourth quarter, but some analysts warned that the increased rise in nonperforming assets could be a drag on earnings into next year.

But Unionbancal executives say that they have been taking a long, hard look at their business lines, and that the credit quality problems will go away.

“Coupled with important changes in our lending practices already instituted, we believe we are putting the worst of our asset quality problems behind us,” said Takahiro Moriguchi, president and chief executive officer, in a press release Friday.

Since midyear the company has been combing through its loan portfolio for signs of previously undetected weakness. And early this year McKinsey & Co. was hired to conduct a strategic review of its business lines. After the seven-month McKinsey review, which was concluded last month, Unionbancal outlined where it plans to spend money — namely its trust and custody business.

“We took a hard look at the trust business and put a finer point on our strengths and weaknesses,” said vice chairman Richard C. Hartnack, speaking Dec. 8 after a board meeting.

At the meeting, which took place before the earnings warning, senior management presented a final budget for some planned changes. The result: The $34 billion-asset company has decided that its current trust and custody business, though small, is big enough to merit expansion.

Mr. Hartnack said that the decision to focus on the trust business was also aided by the 12-month results from a previous acquisition, Imperial Trust Corp. “We had a strategic confirmation that there are good opportunities for us in some parts of the trust business,” he said.

The company has already put its money where its mouth is.

On Dec. 1, Union Bank said it would acquire Copper Mountain Trust Corp., a small trust, custody, and high net-worth advisory firm based in Portland, Ore., with $6 billion of mostly custodial assets, for an undisclosed sum.

Unionbancal currently manages and administers about $132 billion of assets. But the company has told investors to expect more tweaking of its business model, which has undergone a huge cost-cutting and repricing overhaul, called Mission Excel, in the past year. “There are other things on the griddle” for expansion or cutbacks, Mr. Hartnack said.

Unionbancal has already shown it is willing to exit business lines in which the review finds limited growth and profitability. In September it said it would “unwind” a $1 billion indirect automobile lending portfolio and stop originating such loans through a dealer network. That move affected about 80 jobs, and there are rumors of further job cuts.

But, according to Mr. Hartnack, Unionbancal is not considering widespread layoffs, which some larger regional companies have initiated this year.

“There is nothing in the offing about across-the-board staff cuts,” Mr. Hartnack said. Indeed, he said, the company has over 200 open staff positions.

But there will most likely be some further organizational reshuffling stemming from the review during the first quarter, he said. The board and management are due to discuss the issue in January and February.

Wall Street has been crying out for change in Union Bank’s large corporate banking practice. The syndicated loan portion of that business has been a black mark on the company’s results for the past two quarters.

In September the banking company made some inroads, when it replaced its existing chief credit officer, having previously instituted an independent risk monitoring group.

Projections announced Friday were based on “the completion of a detailed and comprehensive review to identify and account for credit impairment currently existing in our commercial loan portfolio,” said Philip Flynn, the new chief credit officer.

Analysts took the announcement as a sign that the company is using fourth-quarter earnings to absorb most of its credit quality problems.

“The fact they took the charge is, I believe, a result of strategic analysis and was expected,” said Campbell Chaney, an analyst with Sutro & Co. in San Francisco.

But he expressed concern that Unionbancal nonperforming asset balances would rise to as much as $450 million, noting it could foreshadow more bad news from corporate lending — and further blows to earnings next year.

“They’re guiding us to $250 million to $300 million in provisions next year, but I’m keeping mine at $400 million just because new nonperformers coming onboard were over a doubling of what they were at the end of September,” said Mr. Chaney.

As Unionbancal completes its strategic review of it business lines, Mr. Hartnack is insistent that it is not walking away entirely from the corporate loan market. “The loan portfolio will reduce naturally as we reduce our problem loans,” he said.

The company’s aspirations in trust conform to its designs to expand in the less interest rate sensitive side of the commercial banking business. Copper Mountain’s trust and custody business leans toward corporate clients — as does Union Bank’s existing portfolio. At the end of the third quarter, personal assets made up 25.2% of assets managed by Union Bank and just 6.1% of all trust and custody assets it held.

Not surprisingly, its current standing as personal wealth manager has made the bank eager to expand its retail trust activities.

“We feel private banking and personal trust business have a lot of potential,” William Wilson, senior vice president in institutional services and asset management. Simultaneous with the company’s strategic review, a group in institutional services has put together its own strategic plan on how to expand this business, he said.

On Friday, Unionbancal’s shares plunged 10% to close at $21.3125 following the earnings announcement.


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