Bank of America attracts wider interest. Citicorp, No. 1, may want all or part of No. 2

The field appears to be widening in the race to capture all or part of the nation's second-largest bank, the troubled Bank of America of San Francisco. One of the contenders may be the nation's largest bank, the New York-based Citicorp. And the field could grow.

``Every large bank that is interested in consumer lending has to be looking at B of A and thinking, `There are pieces in here that they might want to sell that would be of interest to me, and if so, what would I be willing to pay for them?' '' notes Frederick Meinke, a bank analyst at E. F. Hutton & Co.

Last week, Los Angeles-based First Interstate made a bid for BankAmerica, the B of A holding company, which First Interstate valued at $2.8 billion. This week there are rumors that Citibank, the No. 1 bank, is looking into several options, including buying some pieces now and locking in a deal so that it could merge with BankAmerica later on.

There is concern that First Interstate, less than half the size of BankAmerica, might not be able to absorb potential losses, thus creating a new, very large, and very troubled bank in California.

Over the past five quarters, BankAmerica has incurred $1 billion in net losses. It now has around $5 billion in nonperforming loans (ones on which payments are not being made); those will not necessarily go bad, but they worry regulators nonetheless.

New York-based Citibank has much deeper pockets than First Interstate, and it has the advantage of being in another part of the country. But such a merger would create what one analyst called a ``monster bank'' -- with assets of more than $300 billion -- and would certainly cause some concern at the Justice Department over antitrust questions.

In addition, there are legislative barriers. Last summer California passed a law that would allow out-of-state banks to buy a California bank after 1990. A federal bill, which has been passed by the House but not yet by the Senate, would allow an out-of-state bank to bail out a failing bank.

Even if the law does pass soon, it's unlikely to apply to BankAmerica, says Mr. Meinke.

``I don't think Bank of America is a failing bank,'' he says. ``It's got the capacity to work through its problems, perhaps not gracefully, but I think it can get through.''

BankAmerica's other options include selling its Italian subsidiary, which could fetch up to $600 million. It could also sell its discount brokerage, Charles Schwab & Co., or its Washington State subsidiary, Seafirst Corporation, although BankAmerica appears reluctant to do so.

Many banks, including the No. 2 California bank, Security Pacific, have expressed interest in buying pieces of BankAmerica, including some of its 1,162 branches.

Citibank or some other large bank could still acquire BankAmerica by infusing capital now and merging with it after 1990. Such a process is viewed as unwieldy, however.

To limit its risk, the purchasing bank would probably want an escape hatch to withdraw its money before 1990, but ``that's not really capital in the eyes of the regulators,'' Meinke says.

A spokesman at the Federal Reserve would not comment on the position, except to say that ``chairman [Paul] Volcker has expressed no interest in Citibank acquiring BankAmerica.''

There are logistical problems as well. Edward Palmer, former executive vice-president at Citibank, notes that the entire management of Citibank is in Japan and is unlikely to return for a week.

And then there are culture problems. ``The environment between Bank of America and Citibank has been an adversarial one for a long time,'' a former employee says.

``When Citibank first went into California'' by acquiring a San Francisco thrift, he says, ``Bank of America was particularly hostile to Citibank coming in.''

Bringing in A. W. Clausen, who headed BankAmerica before Samuel Armacost (who resigned last week under board pressure), will not change the competitive environment or corporate culture clash.

It's not at all clear that Citibank, even with its deep pockets, would be the right suitor for BankAmerica. ``The problem with Citicorp is they're a little short on capital themselves,'' says Meinke.

He notes that Citicorp has a good record on loan losses, but only $1.4 billion in loan loss reserves (in the second quarter).

``Since both banks would be viewed as somewhat capital short, if you put those banks together you have a bank almost twice as big that is also capital short.

``I don't see that as a very attractive solution.''