Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
This article provides a summary of five of the key players in the "Asian American Bank space": Commonwealth Bank (OTCQB:CWBB), Cathay Bank (CATY), East West Bancorp (EWBC), Hanmi Bank (HAFC) and BBCN Bancorp (BBCN). I discuss the merits of each bank and then provide comparisons to assess relative valuation. While the banks may seem very similar, I will show key differences that a potential or current investor should consider. I make a specific buy/sell recommendation for each, with one in particular a compelling buy.
While most all banks took it on the chin in 2007-2009, many Asian American banks were hit especially hard due to their exposure to Southern California commercial real estate. BUT - these banks are now in position to thrive. These are primarily Korean-American and Chinese-American banks that serve their respective communities. They are based in the Greater Los Angeles area, with additional branches in other cities where their ethnic groups live. These banks live and prosper along with their ethnic communities. More importantly, they have two key elements that will generate growth: (1) their footprint is largely in the robust economy of California, and (2) increasing trade across the Pacific - both imports and exports - will provide ample opportunity for these banks to flourish.
For each bank, I will discuss the strengths and weaknesses, and then provide a comparison to assess relative valuation. Valuations are compared using standard operating and valuation metrics for each of our five banks as they compare to the Five Bank Average. The metrics include the Tangible Common Equity Ratio (TCE Ratio), Efficiency Ratio (Effic. Ratio), Non Performing Assets ex-Restructurings as a % of Assets (NPAs ex/A), Return on Average Assets (ROAA), Return on Average Equity (ROAE), Price to Tangible Book Value ratio (P/TB) and Price to 2014 Estimated Earnings (P/E). This footnote provides the details for calculation of the Five Bank Average metrics. The summary is presented here:
|Five Bank Average|
Commonwealth Bank: Compelling Buy with 10 Points Upside Potential
Commonwealth Bank is vying to be a dominant player in the Korean American banking space. It has recently moved into Center Financial's offices in downtown Los Angeles Korea Town.
Joanne Kim is the President and Chief Executive Officer of Commonwealth. She was most recently President and CEO of Wilshire State Bank, Wilshire Bancorp's Korean-Focused subsidiary with 24 branches, and Executive Vice President of Wilshire Bancorp (WIBC). Previously, she served as Senior Vice President and Branch Manager of Hanmi Bank . Ms. Kim has broad and deep expertise in the Korean American banking space.
Joanne is a first class bank CEO and her rolodex is impressive. She knows the Hanmi clients well and several of the clients seem to be switching from Hanmi to Commonwealth. Hanmi is still struggling (see below) and Joanne is exploiting this and picking up market share. Deposits and Loans at Commonwealth have grown substantially and should reach $1 Billion by the end of 2016.
Gross loans have increased from 14.5%, from $347 million at Q1 2012 to $397 million at Q1 2013. Total deposits have increased 12.2% from $359 million at Q1 2012 to $438 million at Q1 2013. Average common equity has increased 19.4% from $41.7 million at Q1 2012 to $49.8 million at Q1 2013.
In an era where spreads are compressing and earnings are stagnant for many banks, Commonwealth is rapidly growing the bottom line. The last three quarters the core earnings were 57 cents, 69 cents and 76 cents per share. There is no Wall Street coverage but I, and other fund managers who own the stock, expect 2014 forward earnings of $3.60 to $4.00 per share.
The bank still trades off the Nasdaq, but I believe this will soon change. I think Joanne is considering listing on the Nasdaq in the 3rd quarter of 2013. Once the bank is listed Sandler O'Neil, KBW and FIG Partners will most likely pick up coverage.
At a recent price of $17.80, here is how Commonwealth's operating, profitability and valuation metrics compare to our five bank average:
Most compelling are the valuation metrics with a P/E of 5 (all P/Es use 2014 Estimated Earnings) and Price/Tangible Book of 1.1. Profitability is also well above the norm with ROAA at 1.87% and ROAE at 15.55%. Commonwealth's operating metrics are basically in line.
At $17.80, I see very little downside for Commonwealth. On the contrary, once Wall Street takes notice I believe this stock will soar. The stock has a relatively low float and trading volume is thin so I recommend buying with a limit price only.
Cathay Bank: Short Term Hold/Long Term Buy
Cathay Bank is the oldest Chinese-focused American bank in the U.S. With $10.5 billion in assets, it has 31 branches in California and 51 in total. Branch locations are growing with recent announcements for two new branches and one more expected soon. With a branch in Hong Kong and two representative offices in China, Cathay can achieve better client penetration than many other Chinese American banks with no physical presence outside the U.S.
Loans are weighted toward commercial mortgages and commercial loans, with good overall loan growth of 5.2% in 2012 and 5%-6% expected in 2013. Credit quality has generally stabilized with no provision for loan losses in the last three quarters. With NPAs dropping and above average reserve levels, I expect provisions to remain low going forward.
Contrary to industry trends, net interest margin (NIM) has recently widened. I expect it to continue to widen going forward on both ends. We should see further reductions in high-cost wholesale funds and also in low yielding liquid assets.
In the first quarter, Cathay repaid one-half of its outstanding TARP obligation and expects to repay the remainder within the next few months without raising additional capital. In conjunction with the payback, Cathay's Memorandum of Understanding (MOU) with the Federal Reserve Bank of San Francisco has been terminated. As it moves forward, I expect Cathay to manage capital more actively. Management has indicated it will focus capital to rebuild the dividend, buyback stock and look at acquisitions.
Cathay's operating and valuation metrics compare to our Five Bank Average as follows:
TCE and Efficiency Ratios are relatively in-line. NPAs (ex-Restructurings) are slightly high but not problematic. My concern here is with the profitability metrics. ROAA of 1.11% and ROAE of 7.36% is very low, and in my opinion, will hold back stock appreciation in the near term. I expect these metrics to improve over time as Cathay better manages its capital, but it won't happen overnight. With Price/Tangible Book of 1.6 and Price/2014 Est. Earnings of 14, the valuation is in line with the peer group. Cathay has good growth prospects and a widening NIM, but it also has the profitability issue. I think an investor could purchase Cathay as a long term buy, with an expectation for peer group performance over the short term, or take a wait and see approach with an eye toward buying Cathay down the road when profitability measures improve.
East West Bancorp: Buy on A Pullback
East West Bancorp is the largest bank in our group by far with $23 billion in assets. It has more than 120 locations worldwide, with a large footprint in southern California and the Bay area, allowing it to capitalize on the strong California economy. With a number of locations throughout China, it is in the best position to capitalize on the business needs produced by the growth in trade between the U.S. and China. In fact, its name is taken from its goal of serving as the financial bridge between the East and the West.
Q1 2013 Earnings came in at $.50 per share, increasing 11% over Q1 2012 - the eighth consecutive quarterly increase. East West has a track record of rewarding shareholders. They've bought back stock in each of the last few quarters and just raised the dividend (again) from $.10 to $.15 per quarter.
Total loans have grown 6.2% from Q1 2012 to Q1 2013 - with good growth in single family homes, commercial real estate and commercial/industrial loans. Total deposits are up 9.2% over the same period. Loss provisions have been relatively small - $4.3 million in Q1 2013, and I expect them to remain small over the next few quarters.
NIM compression has been an issue. Core NIM has dropped from 4.21% in Q1 2012 to 3.62% in Q1 2013. In the last quarterly call, management reduced NIM guidance but that was before the recent interest rate move. East West Bancorp's stock price has reacted to recent events, up more than 24% from its April 18 low.
East West compares to our Five Bank Average as follows:
TCE is low at 8.23% and is a moderate concern. Efficiency and NPAs are good, as are ROAA and ROAE. ROAE of 12.22% is particularly good. Price to Tangible book of 2.1 is high. Price to 2014 earnings is higher than our peer group, but not out of line. Our peer group P/E of 12 is relatively low. I could have chosen some other banks for comparison that would have produced a higher average P/E - like 13 or 14.
I like East West for the size of its footprint throughout California and its dominant position for a domestic bank in China. The long term growth prospects are excellent. The TCE ratio and Price to Book are slight concerns. I would recommend buying EWBC, but I'm a little concerned with the recent runup in price. A 24% increase over 2 1/2 months is large, and more than most any other peer, in this comparison or outside of it. Personally, I would wait for a pullback before pulling the trigger.
Hanmi Bank: Sell
Another Korean American bank, Hanmi has $2.8 billion in assets and 27 branches in California. Hanmi has recently put up some good numbers earning $10.1 million, or $0.32 per diluted share in Q1 2013 compared to $7.3 million, or $0.23 per diluted share, for Q1 2012. In Q4 2012, Hanmi earned $14.0 million, or $0.44 per diluted share, which included the effect of the reversal of a $5.5 million deferred tax asset (DTA). Hanmi's asset and deposit growth is not as impressive. From Q1 2012 to Q1 2013, total assets were flat at $2.8 million. Total deposits went down from $2.36 million to $2.33 million.
Hanmi is an interesting case study amongst our peer group. It fell from a split-adjusted $180 per share in early 2007 to around $10 in early 2009 - a longer relative fall than any other bank. Since then, the other banks have recuperated, increasing in price many times over -- while Hanmi still sits at around $16. Clearly there have been issues here.
Hanmi put itself up for sale earlier this year but the attempt failed, apparently for a variety of reasons. I'm sure price was first and foremost. Since that effort did not succeed, Hanmi just recently brought in a new President and CEO. Chong Guk Kum was formerly the President and CEO of First California Financial Group, the holding company of First California Bank which was recently acquired by PacWest.
I've met Mr. Kum a few times. While he has big bank experience, I do not see that he has experience in the Korean American bank space. In fact, I do not believe he even speaks the language. Without this experience he does not have the business relationships necessary to grow in this sector. In the Korean culture, relationships are important to doing business and they take time to develop. After going through a "transitional period", where the bank was on the block, and now with a new management team, the environment within Hanmi, and with its clients, may not be the most stable. I know that Commonwealth is gaining market share from previous Hanmi clients, and others may be gaining also. Further, while many on Wall Street seem to believe that a sale is still possible under Mr. Kum, and the bank has publicly declared so, I believe that with the hiring of Mr. Kum that path has been terminated.
Here are the comps:
Hamni compares pretty evenly with our averages. The efficiency ratio is on the high side, but I'm not too concerned. Price to tangible book is good at 1.4 and would suggest an attractive valuation all else equal. But, I wouldn't own Hanmi here. I think Hanmi still needs to prove itself before I'd buy in. I would want to see stability under the new leadership and at least a couple of quarters of profitability and growth.
BBCN Bancorp: Buy Half Position
BBCN Bank is the largest Korean-American bank in the nation with $5.8 billion in total assets. It operates 44 branches in the U.S. along with 5 loan production offices. BBCN reported EPS of $0.22 in 1Q13, missing by $.05 and down from EPS of $0.28 in both 4Q12 and 1Q12. The miss is attributable to a higher provision than expected due to one warehouse property, higher than expected noninterest expense, and NIM compression beyond expectations. NIM was down 12 basis points from Q4 2012, going from 4.61% to 4.49%.
BBCN has very good growth prospects and plans to achieve these through both acquisition and organic growth. BBCN acquired Pacific International Bancorp (OTC:PIBW) in Q1 2013, increasing deposits and loans by about 3%. In addition, BBCN recently announced the acquisition of Foster Bank. Foster operates eight branches in the Chicago metropolitan area and one branch near Washington, DC. The deal adds over $400 million of assets. It positions BBCN as the leading Korean American bank in Chicago and provides an entry to the Korean American community in the Washington D.C area, one of the fastest growing populations of Korean Americans in the U.S. Going forward, I think BBCN will continue to grow through strategic acquisitions.
Overall growth has been excellent. From Q1 2012 to Q1 2013, total assets increased 12% from $5.2 billion to $5.8 billion, total deposits increased 18% from $3.9 billion to $4.6 billion, and total loans increased 19% from $3.7 billion to $4.4 billion.
BBCN has a good management team and recently announced that the Chairman of the Board, Kevin Kim, was appointed to the additional position of President and CEO of BBCN Bancorp, and that Deputy Chief Financial Officer Douglas Goddard was appointed to CFO. In addition, Soo Bong Min has been appointed as President and Chief Executive Officer of the wholly owned subsidiary, BBCN Bank. Mr. Min has broad experience as CEO of other Korean American banks. I have confidence in this team and they have an excellent track record of performance.
The comps are:
The operation metrics look good at 11.77% TCE ratio and 42.48% Efficiency ratio. In spite of the increase in NPAs in Q1 2013, NPAs look good. ROAA is in line with our peer group but ROAE is low at 10.02%. At 1.8 x Tangible Book and 13 x 2014 Estimated Earnings, BBCN has a rich valuation. With its track record, size and growth outlook it deserves a premium multiple and it has one.
An investment recommendation is a tough call here. The stock is arguably fully valued. Owning the stock, I rate it a hold. If I didn't own it and was looking to put some money to work and needed a new position, I might take a half-position here. If the valuation gets better in the future, I would increase to a full position.
EWBC HAFC CATY BBCN CWBB Average TCE Ratio 8.23% 10.72% 10.72% 11.77% 10.22% 10.33% Effic. Ratio 44.06% 58.65% 48.50% 42.48% 49.29% 48.60% NPAs ex/A 0.69% 1.29% 1.38% 0.85% 0.64% 0.97% ROAA 1.30% 1.43% 1.11% 1.43% 1.87% 1.43% ROAE 12.22% 10.56% 7.36% 10.02% 15.55% 11.14% Price 28.20 17.40 22.40 15.00 17.80 TB 13.68 12.28 13.87 8.57 16.52 P/TB 2.1 1.4 1.6 1.8 1.1 1.6 For. Earns 2.11 1.33 1.59 1.13 3.60 P/E 13 13 14 13 5 12