California bank goes after China
United Commercial Bank plans to make history by purchasing a Shanghai financial institution and becoming the first Chinese American community bank to offer a wide range of services in China.
With Business Development Bank Ltd., which United Commercial said Tuesday that it had agreed to buy for $205 million, the San Francisco-based bank could offer its customers a one-stop shop in the U.S. and China.
Analysts said the purchase, which must be approved by regulators in both countries, would put pressure on United Commercial’s chief competitors, East West Bancorp Inc. and Cathay General Bancorp, to step up their activities in China.
East West and Cathay have been more focused on expansion in California and in cities elsewhere in the U.S. with large Chinese American communities.
“This definitely gives them [United Commercial] a competitive advantage in trade finance,” said Lana Chan, a banking analyst at BMO Capital Markets in New York.
United Commercial is owned by UCBH Holdings Inc., whose shares rose 9 cents to $18.68.
The opening of China’s financial sector, a condition of the country’s entry into the World Trade Organization, has sparked fierce competition even though operating a bank in China carries notable risks, such as an uncertain regulatory climate, a lack of transparency and volatile real estate and stock markets.
Acquiring the Shanghai bank would allow United Commercial to expand into China much more quickly than if it tried to establish an operation from scratch, said Jonathan Downing, executive vice president of UCBH.
Downing said Business Development Bank, the first wholly foreign-owned bank in China, had a strong management team and a solid loan portfolio with good credit quality.
The Shanghai bank, which would become a unit of United Commercial, operates a branch in the city of Shantou and a representative office in Beijing. United Commercial operates 66 U.S. locations, mostly in California, plus a branch in Hong Kong and representative offices in Shanghai and Shenzhen, China, and in Taipei, Taiwan.
The Shanghai bank is currently allowed to lend to only foreign-invested companies or individuals, but Downing said United Commercial would apply for permission to expand that service to locals.
“We will be the only [U.S.] community bank with this capability,” he said.
United Commercial was founded in 1974 as United Federal Savings & Loan Assn. to serve San Francisco’s Chinese community. It now has $10.35 billion in assets, and has been laying the groundwork for several years to support its expansion into the U.S.-China trade arena.
That has involved the purchase of banks in Seattle, Houston and New York, which have major ports and large Chinese American communities.
United Commercial agreed to pay a premium for the Shanghai institution, which has $217 million in assets and a loan portfolio of $188 million. James Abbott, a research analyst at Friedman Billings Ramsey, predicted that the bank would get a “very positive return on investment.”
“For the small-business importer in the Los Angeles basin this would streamline the process,” he said. “This is a one-stop shop.”
The bank’s move puts pressure on its competitors for business in Southern California’s Chinese community, said Joe Morford, an analyst at RBC Capital Markets who follows Asian American banks.
East-West Bancorp has “leveraged its position” as the state’s second-largest independent bank to go after mainstream businesses in Southern California, Morford said. Los Angeles-based Cathay General, No. 3 in the market, has been acquiring banks in key Chinese American communities nationwide.
Morford said all three were doing well, but he said the Shanghai deal would “be an advantage [for United Commercial] in building its business longer term. They can really handle both sides of the transaction.”
East West and Cathay General also have China in their sights but haven’t been as aggressive in their expansion overseas. East West has a branch in Hong Kong and a representative office in Beijing. A deal by Cathay General to purchase a 20% share of Shanghai-based First Sino Bank for $52.2 million fell through last year after the companies were unable to get Chinese government approval.
Executives from Pasadena-based East West couldn’t be reached Tuesday for comment.
Heng Chen, Cathay’s executive vice president, said he didn’t want to comment on the problems with the First Sino deal or speculate about his firm’s plans for China. But he said the bank expected to get final government approval to convert its Hong Kong office to a full branch within the next few months. He said Cathay had representative offices in Shanghai and Taipei.
“We’re concentrating on Hong Kong first,” he said.
Although China’s economy is fast-growing, it isn’t easy to make money in the banking sector because the government maintains tight control over lending, said Nicholas Lardy, an expert on China at the Peter G. Peterson Institute for International Economics in Washington. He said restrictions on interest rates, for example, made it hard for foreign banks to offer customers competitive loan rates.
“Most people believe it’s going to be very hard to make much money,” he said. “In a sense, China’s overbanked, particularly in the current environment where the interest rate structure is highly regulated.”
Times staff writer E. Scott Reckard contributed to this report.
