Contrary to the previously held notion, a federal reserve bank economist says Hispanic-owned banks in the country are just as profitable as “non-minority institutions,” even though the former suffer bigger loan losses.
Robert Clair of the Federal Reserve Bank of Dallas says the Hispanic banks, unlike other minority-owned banks, have improved their performance by pricing loans higher to compensate for exposure to credit risk and by setting service charges higher to offset larger non-interest expenses.
“The research shows their profitability is on par with the non-minority institutions,” Clair said in an interview.
The research findings are important, Clair said, because minority banks render valuable service to minorities not always provided by non-minority banks.
He said his findings may help counteract the suggestions of previous researchers that higher credit standards be enforced on minority-owned banks. Clair said such standards would be overly restrictive and would work against the needs of minority-owned banks’ borrowers. A minority bank was defined as one in which a minority group owns 50% or more of the institution.
There were 100 minority-owned banks in the country at the end of 1983, the latest year for which figures are available. Blacks owned 49 banks, Hispanics 25 banks, Asian minorities 13, American Indians three, multiple minorities (majority ownership by more than one minority) two and women eight.
There were about 15,000 “non-minority banks” in the country at the end of 1983. Clair said non-minority banks are those whose majority ownership is held by those not classified as minorities.
The combined assets of all minority banks were $4.6 billion. Of that, Hispanic banks accounted for $1.6 billion, Clair said.
Clair took issue with the premise that Hispanic banks ought to be poor-performing institutions because, like any other minority-owned business, they are exposed to greater loan losses and greater volatility of deposits.
He said the Hispanic banks have prudently set stiffer performance standards to overcome those handicaps.
“As a result, their rate of return on assets and equity is not significantly different from their non-minority owned competitors,” he said. “When one looks at gross return on loans, it appears to be higher in Hispanic banks, but after adjustment for all losses, it is the same as non-minority banks.”
On the deposit side, Clair said Hispanic banks charge a higher service rate than non-minority banks, thus compensating for the expense of having a weaker deposit base.
Quoting figures from his research, Clair said the total operating expenses at Hispanic banks are 10.39% of total assets, far in excess of the 9.56% for non-minority banks. However, the income is higher at Hispanic banks--11.62% of total assets compared to 10.87% for non-minority banks.
“The result is that the net income after taxes as a percentage of total assets is 0.78 for Hispanic banks and 0.97 for non-minority banks,” he said. “That difference is no longer significant statistically.”
He said he will be doing similar research on black-owned banks which operate in a different market setting than Hispanic banks.
“But other minority groups ought to examine what we have learned from Hispanic banks,” he said. “If other minority-owned banks are suffering from the problems of high loan losses and less stable deposits, they can learn something from the performance of Hispanic banks and how they address the same problems through interest rates and service charges without denying credit to the borrowers they serve.”