Banks in the West appear to be on the road to a strong performance in 1988, but lingering concerns about asset quality could derail the recovery, according to a study by the Federal Reserve Bank of San Francisco which oversees the Salt Lake branch of the Federal Reserve.

More than 83 percent of the approximately 800 banks in the nine Western states, including Utah, that comprise the Twelfth Federal Reserve District were profitable in the first quarter, the Fed reports.Overall, aggregate earnings in the quarter jumped to $850 million from $555 million in the first quarter of the 1987, with banks in California, Nevada and Hawaii showing the most improvement.

The study, by banking economist Gary C. Zimmerman, notes the results are encouraging compared to a weak performance in 1987. Following last year's extraordinary $3.5 billion expense for increasing loan-loss reserves, Western banks suffered an aggregate loss of $133 million, their first loss since the 1930s. Moreover, 25 percent of the banks in the region lost money last year.

Western bank assets continued to stagnate around the $400 billion level as regulatory and market pressure on banks to consolidate and strengthen capital bases, combined with sluggish loan demand, limited growth opportunities for many banks.

Zimmerman noted several factors that accounted for the banks' improved performance which are expected to continue throughout 1988.

"Overall, the Western economy (with the exception of Alaska) continues to perform well and to outperform the nation as a whole," writes Zimmerman.

"Expenses for provisions for loan losses are running well below the levels of a year ago, in part because of the continued strength of the economy, and net interest margins (the difference between the average return on earning assets and the average cost of funds) also widened, most notably in California because of the conservative pricing of consumer-type deposits."

But, the report says, "the well-publicized asset-quality problems still linger."

"Western banks still need to increase loss reserves in 1988 because of uncertainty over less-developed-country debt reschedulings and repayments and ongoing problems with troubled energy, real estate and farm sector loans," states Zimmerman.

Zimmerman says the Western banks' interest rates on deposits are lower than those offered by Western savings and loan associations and credit unions. That has caused a drop in the banks' share of the deposit market because deregulated consumer deposits are moderately interest-sensitive in the long run.