In wake of Japanese industry: the banks. Industrial beachhead in US brings on cash-laden institutions

``We have to be more aggressive,'' intones Seishichi Itoh, president and chief executive officer of California First Bank, a subsidiary of Bank of Tokyo. More aggressive?

Japanese banks setting up shop in California have not exactly been blushing wallflowers. Strolling down California Street -- bankers' boulevard in San Francisco -- is like stumbling upon an annex of Tokyo's financial district.

Flush with funds from their booming economy, and imbued with the belief its cheaper to buy market share than build it, Japanese bankers have spent the last decade on a California bank-buying spree.

Today, four of the top 10 banks in California are Japanese owned. Some 20 percent of the $82.5 billion in assets held by California-chartered banks are in Japanese hands. Of the 38 Japanese banks in the United States, 23 make the Golden State their home.

While Japanese bankers are spreading into the Midwest, the game plan in California hasn't changed much.

``Our target is to double our size over the next three to five years,'' says Osamu Yamada, chairman of Bank of California, a Mitsubishi Bank subsidiary. ``A $50 to $200 million asset bank is a good target,'' Mr. Yamada notes from his expansive corner office.

Bank of California just beefed up its trust department by acquiring $150 million in assets and personnel making up WestAmerica Bank's trust division. Yamada also notes that the troubles at BankAmerica and the Wells Fargo/Crocker National merger have provided him with important new staff.

Earlier this year, the Los Angeles-based Golden State Sanwa Bank vaulted from being California's 13th-largest commercial bank to seventh place by purchasing the British-owned Lloyds Bank California for $263 million.

And the trend to build a potent Japanese banking presence in the US is likely to continue, for several reasons:

A 40 percent drop in the dollar against the yen acts like a big ``For Sale'' sign for cash-rich Japanese banks.

Banking follows trade and investment. As Honda, Sony, and Toyota set up plants in the United States, they need capital and technology. The banks provide loans and play matchmaker.

``The Japanese investment trend is just starting,'' says Hang-Sheng Cheng, vice-president of international studies at the Federal Reserve Bank of San Francisco. ``That's why I think the Japanese banking presence is going to increase everywhere -- not just in California.''

Deregulation is coming to Japan, but more slowly. California banks provide a convenient deregulated classroom for Japan's financiers.

But even with some $5 billion in assets, the biggest Japanese-owned California banks are dwarfed by the state's top banks. So the urge to merge is driven by a desire to attain and secure a certain critical mass or market share.

``California is a very tough market to grow in,'' says Edward Young, Japanese bank analyst at Moody's Investment Service in New York. ``You're playing against the likes of BankAmerica [$105 billion in assets], Security Pacific [$44 billion], First Interstate [$21 billlion], and Wells Fargo [$38 billion].''

And competition is going to become stiffer. On July 1, 1987, California opens up to interstate banking on a regional reciprocal basis.

``I don't see any threat from those banks in Western states. They're not so big,'' says Mr. Itoh, head of California First. But the Japanese are concerned about the national interstate banking floodgates due to part Jan. 1, 1991.

``We have to prepare,'' warns Yamada. ``In 1991, the major East Coast banks will come. '' He's focusing Bank of California on upscale private banking, betting that New York money-center banks will aim for the broad retail market.

``I think we can avoid the big collision that way,'' he says.

Despite the xenophobia sometimes generated by foreigners scooping up US assets, most analysts view Japanese bank ownership as beneficial.

``The enhanced competition gives borrowers wider access to banking services,'' says Mr. Cheng at the Federal Reserve Bank. ``Overall, it has facilitated the expansion of trade between our countries.''

In one small example, Yamada boasts of securing a choice location for Mrs. Field's Cookies in Tokyo's bustling Ginza business and entertainment district. The spot was obtained through Bank of California's connections with Mitsubishi Estate, the largest real estate concern in Japan. A Mrs. Fields spokeswoman confirms that ``it's probably our best store in the Orient.''

While mergers often result in staff cuts, 95 percent (or more) of the employees and customers at Japanese-owned banks are Americans. ``We are an American bank,'' insists Yamada. He notes that only 11 of the 2,000 employees are Japanese.

American bankers have been known to complain about the typical Japanese method of stealing market share by underpricing -- offering loans at 1/8 to 1/4 percentage points below US banks. But bank regulators say the increased competition is good for borrowers, if tough on bank profit margins.

``I don't think any of the Japanese-owned banks have done tremendously well,'' says Mr. Young at Moody's. For every $100 in assets, California banks averaged 76 cents of net income, according the 1985 State Superintendent of Banking annual report. By comparision, Bank of California's return on assets climbed to an unimpressive 67 cents during 1986, and California First reports a 55 cent return.

``We've had some bad experiences with loans to the mid-sized [business] market,'' explains Itoh at California First. ``Bad loan chargeoffs were up in '83, '84, and '85. I hope '86 will decrease. We still need to improve our loan quality.''

Regulators don't worry about the viability of these banks, since their Japanese parents have deep pockets. (Measured in US dollars, Japan is home to seven of the 10 largest banks in the world, according to American Banker's 1985 year-end survey.) In fact, foreign banks are often welcome partners for salvaging ailing US banks.

California First was wobbling when Bank of Tokyo bought it in 1975. Now, the sixth-largest bank in the state, with some 600,000 customers, it is well on the road to recovery.

Earnings, says Itoh, will increase 20 percent over the third quarter of 1985. Consumer loans are up. And despite a less than glowing return on assets, California First's stock price more than doubled in the last year.

No wonder Seishichi Itoh is feeling more aggressive.

Second in a series. Next: Japan is becoming the biggest foreign player in the US real estate market.