Not long ago there would have been little reason for Cathay General Bancorp in Los Angeles' Chinatown to acquire a one-branch, struggling Chinese American bank in New Jersey.
It was a matter of first things first. Starting in 1999, Cathay sought to expand by targeting the growing Chinese American population in New York, buying other banks and opening new branches in Manhattan, Brooklyn and Queens.
With a strong base now established in New York -- including a regional office with 300 employees -- last month's $9.4-million purchase of United Heritage Bank in Edison, N.J., was a chance to reach customers in the suburbs, Cathay Chairman Dunson Cheng said.
"Edison has a sizable Asian population -- there are many people who work in New York and live in New Jersey," Cheng said of the community about 35 miles from Midtown Manhattan. "And since we have nine branches in New York City, we feel it will be rather easy to manage."
Such confidence has become a hallmark of Cathay and its local rival in the ethnic Chinese market, Pasadena-based East West Bancorp Inc. East West is now the second-largest commercial bank based in Los Angeles County and Cathay is No. 3, with robust profits that have made them standouts among California's many specialty banks.
The two banks have many similarities. Besides starting in Chinatown, they even shared a parent -- the late Fung Chow Chan, whose family still owns the Phoenix Bakery in Chinatown.
Chan was among a group of business owners who opened Cathay in 1962. In 1973, Chan formed East West as a savings and loan to finance home purchases by ethnic Chinese.
Since East West converted to a commercial bank charter in 1995, the two institutions have gone head-to-head, concentrating on loans to small businesses and financing of commercial real estate. But they have adopted markedly different growth strategies, with Cathay looking far afield while East West has concentrated mainly on its backyard.
Cathay, with nearly $8 billion in loans and other assets, is aiming to create a national niche, with branches in the Northeast, Chicago, Texas and Washington state, where the Asian American population has fewer banks competing for its business.
Cathay has 18 branches in six states outside California, along with 34 offices in the Golden State.
East West has 62 California branches but just one outside the state, in Houston. With nearly $11 billion in total assets, it has made a point of courting mainstream business as well as the ethnic market, and in the view of its chairman, Dominic Ng, has "hardly touched the surface" of the potential market in California.
Judging by growth, these and other Asian banks have left most broader-focused community banks in the dust. Cathay's assets have increased fivefold in the last 10 years and East West's, nearly sevenfold. The average growth in assets for a group of 19 California banks of about the same size was three times during the same stretch, said Grace Wickersham, senior vice president of Carpenter & Co., a bank consulting firm.
Both banks have experienced few loan problems, while profits have soared. Cathay, which earned $13 million for all of 1996, reported $90.7 million in net income for the first nine months of this year. East West, whose 1996 earnings totaled $3 million, recorded a $109.9-million profit for its first nine months of 2006.
A taste for acquisitions and the generally strong economy since the recession of the early 1990s have helped drive this growth, analysts say. The banks also have benefited from specializing in trade financing and their contacts in Asia as well as a booming market for loans on commercial properties. What's more, Chinese Americans have proved to be an enviable base of clients.
"They've targeted one of the fastest-growing demographic niches in the country, with the population growth in Chinese American communities," RBC Capital Markets analyst Joseph Morford said.
After handily outperforming most bank stocks for years, neither Cathay nor East West has thrilled Wall Street recently, which analysts say may partly reflect a downturn in commercial real estate lending.
East West bank shares fell 14 cents Friday to $35.47 and are down 2.8% this year. Cathay rose a penny Friday to $34.37 and is off 4.4% year to date.
By comparison, the Standard & Poor's 500 index of blue-chip stocks has gained nearly 12% this year.
Analysts note that success is far from guaranteed in the Chinese American niche. GBC Bancorp Inc., the parent of Los Angeles-based General Bank, ran into serious trouble early this decade after a series of speculative investments, many of them generated by a loosely supervised lending office in New York, went sour.
Cathay acquired GBC in 2003 for what analysts now regard as a bargain-basement price of $431 million. But it must now take extra care in supervising its far-flung holdings to avoid running into similar problems, BMO Capital Markets analyst Lana Chan said.
At East West, she said, the greatest potential danger is concentrating too much on commercial real estate in a single market, Southern California. Banks in the region were hammered with losses during the first half of the 1990s, when a national recession and cutbacks in weapons spending by the federal government coincided with troubles including riots, earthquakes and the Orange County bankruptcy.
What East West Chairman Ng remembers about the early '90s is that loans at East West held up better than at "95% of the banks and savings and loans in Los Angeles."
The bank continues to avoid overly risky loans, he said, and California's market is so huge that he sees no reason to expand outside the state until East West has the market share of much larger banks such as Union Bank of California.
With more than 60% of East West's commercial banking loans now made to non-Chinese clients, Ng, citing the state's gross domestic product, said the bank has ample opportunity to expand in areas outside its main area of concentration, the San Gabriel Valley with its large Asian population.
"California's GDP is the sixth- or seventh-largest in the world, and for us with our tiny size to think of running out of room is ludicrous. We have hardly any impact in Orange County or West L.A., or out in Ontario, San Bernardino or Riverside. In Sacramento we have nothing, in Silicon Valley only two or three branches, and in San Diego nothing," Ng said.
"In California we have hardly touched the surface."
Cathay says its greater focus on the ethnic market -- only 40% of its loans and 20% of deposits are with non-Chinese customers -- has made it more attractive to enter far-flung markets that historically have been served only by small Asian American banks.
Cheng said the bank wasn't indulging in unusual investments such as those that got General Bank in trouble, just duplicating a formula that has worked well in California. Besides, he said, many of Cathay's longtime customers have expanded their businesses to other cities and appreciate the convenience of having the bank's branches in them.
"The broader footprint gives us a better chance to allocate our resources," Cheng said. "For example, Southern California real estate has been slowing down," so the operations in other states will help Cathay weather "regional fluctuations."
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Tale of two banks
*--* East West Bank Cathay Bank California branches 62 34 Out of state branches 1 18 Assets $10.80 billion $7.62 billion Deposits $7.12 billion $5.47 billion 9-month revenue '06 $297.5 million $228.3 million 9-month profit '06 $109.9 million $90.7 million Return on equity 15.1% 13.5% % loans delinquent 0.13% 0.49%
Note: All figures as of Sept. 30 except out of state branches, including Cathay's planned purchase of branch in New Jersey.
Sources: FDIC, companies