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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 (NASDAQ:CATY), East West Bancorp (NASDAQ:EWBC), Hanmi Bank (NASDAQ:HAFC) and BBCN Bancorp (NASDAQ:BBCN). I discuss the merits of each bank and then provide comparisons to assess relative valuation.

While most all banks took a hit in 2007-2009, many Asian-American banks were hit especially hard due to their exposure to Southern California commercial real estate; however, 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:

  1. Tangible Common Equity Ratio (TCE Ratio)
  2. Efficiency Ratio (Effic. Ratio)
  3. Return on Average Assets (ROAA)
  4. Return on Average Equity (ROAE)
  5. Price to Trailing 4 Quarters Earnings (P/E trailing)
  6. Price to 2014 Estimated Earnings (P/E forward).

The footnote provides the details for calculation of the Five Bank Average metrics (data taken from SNL reports). The summary is presented here:

Five Bank Average

TCE Ratio

11.05%

Effic. Ratio

50.18%

ROAA

1.47%

ROAE

11.59%

P/E-trailing

15

P/E-forward

13

Commonwealth Bank : The Undiscovered Gem with 50%+ Upside

Commonwealth Bank is on its way to becoming a major player in the Korean American banking space. It has recently moved into Center Financial's offices in downtown Los Angeles Korea Town. Commonwealth provides a complete range of commercial banking products and services to businesses and individuals in the Los Angeles area.

Joanne Kim is the President and Chief Executive Officer of the Commonwealth Bank. Ms. Kim was previously President and Chief Executive Officer of Wilshire State Bank. Prior to that, she served as Senior Vice President and Branch Manager of Hanmi Bank .

I met with Joanne last week and she is very confident about Commonewealth's prospects. Joanne is a first-class bank CEO and her rolodex is impressive. She knows the Hanmi loan officers and clients well and several of them have been moving from Hanmi to Commonwealth. In our opinion Hanmi is still struggling and Joanne is exploiting this and picking up market share.

It is Joanne's intention to build a billion dollar asset bank (this statement was loudly proclaimed at the annual meeting) and she is well on her way. The new location in the heart of Korea town has doubled deposit gathering and loan production since moving into the new space. Joanne expects loans to continue to grow by 17-20 percent per year going forward. This is largely due to Joanne's contacts - loan growth has doubled because the number of loan officers has doubled - going from 10 to 20. In my opinion, Joanne will continue to take loan officers from her competitors and Commonwealth will continue its stellar growth.

Joanne is working to expand NIM through both reducing expenses and increasing loan interest rates. Expense reduction is being achieved by rolling off CDs with relatively higher earned rates and by an increasing share of demand deposits. Older fixed loans at 4% rates and lower are being replaced by new loans coming on at 4.5-6.0% with a five year fix term and adjustable thereafter. The bank stated to us that it will not make loans under 4.5% and most of the rates are variable.

Commonwealth recently reported third quarter net income of $2.2 million, a 41% increase over Q3 2012 net income of $1.7 million. Earnings per share increased to $.64 from $.53, a 21% increase. In addition, Commonwealth recently repaid its entire TARP obligation.

With this growth record and future potential, we would expect Commonwealth to trade at a premium to its peers. Quite the contrary. Here are the comparables:

Average

CWBB

TCE Ratio

11.05%

11.88%

Effic. Ratio

50.18%

49.96%

ROAA

1.47%

1.90%

ROAE

11.59%

15.53%

Price

19.95

Trail. Earns

2.75

P/E-trailing

15

7

Forw. Earns

3.70

P/E-forward

13

5

Can you see why this has such tremendous upside potential? The 4 Quarter Trailing P/E is 7! The 2014 Forward P/E is 5! On top of that, ROAA is 1.90% and ROAE is 15.53%. Not only does Commonwealth have exceptional growth, but the valuation is extraordinary. How can this situation exist? Because Commonwealth has no Wall Street coverage.

Next up for Commonwealth is a NASDAQ listing. The option has recently been presented to the Board of Directors, and in our opinion, the Board will approve it. NASDAQ is important as it will bring analyst coverage to the stock (there is no Wall Street coverage now). It will also bring liquidity and will allow bank funds to purchase it. Since bank funds are eager to purchase stocks paying dividends, we believe Commonwealth will institute a dividend once listed.

We suggest investors buy ahead of the NASDAQ listing. We think that just the announcement of the NASDAQ listing moves the bank price to 25 or higher. After it is listed, we expect the primary banking research firms to pick it up. These include Sandler O'Neil, Stiefel (who purchased KBW), Raymond James and Fig Partners.

The bank shares will be an easy idea for these firms to bring to their clients given the obvious mismatch in valuation. If Commonwealth traded at the 5-bank average multiple of Forward P/E, the stock would trade at 52! Even if it traded at the 5-bank average multiple of Trailing P/E, it would trade at 43!

Once listed, Commonwealth becomes a target for a potential acquirer. It has all of the characteristics a suitor wants - exceptional growth, high quality business, very low valuation, NIM on the verge of expansion and a size that's easy to digest. Recent M&A activity in this space suggests there should be more to come. Nara merged with Center Financial to create BBCN. WIBC acquired Sayhan Bank, closing just last week. If Commonwealth gets a bid we think it would have to be well north of 35 to be acceptable to the Board.

Cathay Bank: Put it on Your Watch List

Cathay Bank is the oldest Chinese-focused American bank in the U.S. With $10.8 billion in assets, it has 31 branches in California and 51 in total. Branch locations are growing with recent announcements for two new branches. 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.

Financial results at Cathay are on the upswing. In the third quarter, net recoveries of loans were $3.6 million compared to net charge-offs of $7.7 million the same quarter a year ago. Loan growth was solid at $137.6 million, or 7.2% on an annualized basis. Earnings per share was $0.38 compared to $0.33 for the same quarter a year ago. A number of positive factors produced the increase - the reversal for credit losses, increases in net interest income, increases in wealth management commissions and decreases in other real estate owned ("OREO") expenses. Credit quality has generally stabilized with no provision for loan losses in the last four quarters. With NPAs dropping and above average reserve levels, I expect provisions to remain low going forward.

Net interest margin (NIM) has been widening and should 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.

Cathay recently repaid its remaining TARP obligation 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:

Average

CATY

TCE Ratio

11.05%

10.56%

Effic. Ratio

50.18%

54.63%

ROAA

1.47%

1.14%

ROAE

11.59%

7.55%

Price

26.25

Trail. Earns

1.34

P/E-trailing

15

20

Forw. Earns

1.63

P/E-forward

13

16

TCE and Efficiency Ratios are slightly worse than average. But my concern here is with the profitability metrics. ROAA of 1.14% and ROAE of 7.55% are 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. 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 $24.5 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.

For the third quarter of 2013, net income was $73.2 million, an increase of $2 million or 3%. Earnings per share came in at $0.53 per dilutive share, an increase of $0.05 or 10% from the prior year period. So, while EPS increased nicely, it was mostly achieved by reducing share count not by increasing earnings. Year-to-date (3rd quarter) loans increased 6% or $946.7 million and total deposits also increased 6% or $1.1 billion. Year to date, fee income has increased 20% to $81.4 million.

East West recently signed a definitive agreement to acquire MetroCorp Bancshares, Inc. (NASDAQ:MCBI), headquartered in Houston, Texas. MCBI has $1.6 billion in total assets and 18 branches. It's a good fit for East West as it significantly increases their presence in Texas. They expect the acquisition to close in the first quarter of 2014 and to be accretive to 2014 earnings.

NIM compression has been an issue. Core NIM has dropped from 3.95% in Q3 2012 to 3.62% in Q2 2013 to 3.44% in Q3 2013. This should be monitored closely.

East West compares to our Five Bank Average as follows:

Average

EWBC

TCE Ratio

11.05%

7.98%

Effic. Ratio

50.18%

45.54%

ROAA

1.47%

1.27%

ROAE

11.59%

12.44%

Price

34.28

Trail. Earns

2.04

P/E-trailing

15

17

Forw. Earns

2.31

P/E-forward

13

15

TCE is low at 7.98% and is a concern. Efficiency, ROAA and ROAE are good. P/Es are slightly high, although in all fairness the average P/Es are brought down due to the inclusion of Commonwealth in the group.

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. But the TCE and valuation are concerns. It's arguably fully valued at this level. You could buy a small position here, but I would rather wait for a pullback before jumping in with both feet.

Hanmi Bank: Hold/Sell

Another Korean American bank, Hanmi has $2.8 billion in assets and 27 branches in California. In the first nine months of 2013, net income was $30.0 million, or $0.94 per diluted share, compared to $28.7 million, or $.91 per diluted share, in the first nine months a year ago, excluding the $47.7 million net tax benefit from the DTA valuation allowance reversal in 2012. This represents 3.2% growth in earnings per share.

On the balance sheet side, Hanmi's asset growth has been flat, at $2.84 billion in Q3 2013 from $2.81 billion in Q3 2012. Total deposits, however, increased slightly from $2.36 million to $2.43 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 has just recently moved up to around $20 from $13 earlier this year.

Hanmi put itself up for sale last winter 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:

Average

HAFC

TCE Ratio

11.05%

13.95%

Effic. Ratio

50.18%

56.12%

ROAA

1.47%

1.55%

ROAE

11.59%

11.37%

Price

19.74

Trail. Earns

1.38

P/E-trailing

15

14

Forw. Earns

1.35

P/E-forward

13

15

The efficiency ratio is on the high side, but I'm not too concerned. Otherwise, Hanmi compares pretty evenly with our averages. 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. I would also want to see some growth - preferably consistent growth over some period of time - something which has yet to be seen here.

BBCN Bancorp: Buy Half-to-Full Position

BBCN Bank is the largest Korean-American bank in the nation with $6.3 billion in total assets. It operates 44 branches in the U.S. along with 5 loan production offices. BBCN has been putting up some impressive numbers. It reported third quarter net income totaling $23.6 million, or $0.30 per diluted common share. Both represent 28% increases over the net income in the 2012 third quarter. Gross loans were $4.90 billion, a 14% increase year-to-date; total deposits were $5.02 billion, reflecting a 15% increase year-to-date and total assets were $6.34 billion, a 12% increase year-to-date.

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 acquired Foster Bank in Q3 2013. 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.

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:

Average

BBCN

TCE Ratio

11.05%

10.87%

Effic. Ratio

50.18%

44.64%

ROAA

1.47%

1.47%

ROAE

11.59%

11.04%

Price

16.15

Trail. Earns

1.09

P/E-trailing

15

15

Forw. Earns

1.17

P/E-forward

13

14

The operation metrics look good - and the 44.64% Efficiency ratio is really good. ROAA and ROAE are in line with our peer group. Valuation is good at 15 x trailing earnings and 14 x forward earnings - remember the average valuations are slightly "distorted" due to the inclusion of Commonwealth, so BBCN's P/E numbers are actually lower than the average of the remaining banks.

I think BBCN is a buy at this point. With its growth potential and attractive valuation it's a good bet going forward.

Footnote

Data taken from SNL reports.

EWBC

HAFC

CATY

BBCN

CWBB

Average

TCE Ratio

7.98%

13.95%

10.56%

10.87%

11.88%

11.05%

Effic. Ratio

45.54%

56.12%

54.63%

44.64%

49.96%

50.18%

ROAA

1.27%

1.55%

1.14%

1.47%

1.90%

1.47%

ROAE

12.44%

11.37%

7.55%

11.04%

15.53%

11.59%

Price

34.28

19.74

26.25

16.15

19.95

Trail. Earns

2.04

1.38

1.34

1.09

2.75

P/E-trailing

17

14

20

15

7

15

Forw. Earns

2.31

1.35

1.63

1.17

3.70

P/E-forward

15

15

16

14

5

13

Source: One Asian-American Bank Excels Far Beyond The Pack

Additional disclosure: I may initiate a long position in BBCN within 72 hours.