Ethnic Banks See Market Gains in Limited Growth

By CONOR DOUGHERTY

Staff Reporter

There comes a time in many relationships when it’s no longer personal it’s business.

Such was the case with French banking giant BNP Paribas SA’s sweep into California, which included the purchase of Los Angeles-based United California Bank. The $2.4 billion deal for UCB, the successor to the merged Japanese Sanwa and Tokai banks, registered barely a ripple in the highly insular world of local ethnic banking.

After a decade of mega-mergers, the roster of banks based in Los Angeles is now dominated by those servicing specific ethnic communities, particularly Asian.

But in the case of UCB, with $11 billion in assets and 115 branches statewide, the company had ceased being a “Japanese” bank.

UCB’s Chief Executive, Ryosuke Tamakoshi, said that was all part of the plan. Only 18 UCB branches, less than 16 percent, are focused on the Asian community, and when the Sanwa/Tokai merger was announced last summer, Tamakoshi said that the new name more clearly conveyed the bank’s commitment to the California market.

“Most banks have to (transcend ethnicity) to get to that size, certainly UCB did,” said Jim Hill, a managing director at investment banking firm Friedman, Billings, Ramsey & Co. in Irvine.

BNP Paribas plans to merge UCB with Bank of the West, a subsidiary of Honolulu-based BancWest Corp., which BNP owns. Hill said that after the deal closes, he expects BNP will leave day-to-day operations to Bank of the West, which has its share of Chinese and Japanese customers.

“They will find the assimilation of UCB relatively easy,” said Hill, who has advised several Japanese-owned banks, including Sanwa and Tokai. “They’re buying geographic diversity. I don’t (expect) to see any ethnic issues.”

Meanwhile, customers of smaller, locally based banking institutions remain more concerned with the ethnicity of their bank’s owners than those of UCB.

“(Ethnicity) is an issue, it’s just a question of magnitude,” said Hill. “There will always be bias (among immigrant groups) to foreign-owned banks, and it tends to be a bigger issue in the smaller banks.”

Though UCB shared its roots with other institutions catering to an ethnic clientele, the similarities had long since ended.

Local domination shifts

In becoming a statewide banking force, UCB left the L.A. market to be dominated by independent players a fraction of its size.

Today, more than a third of the 15 largest L.A.-based banks are organized around specific ethnic groups, including four of the six largest. They range is asset size from $1.2 billion to $3 billion and rely so heavily on a loyal customer base, mostly Chinese and Korean, that a change to non-ethnic ownership could result in an exodus of deposits.

Because of the emphasis on service and the resulting impetus to stay small, don’t expect to see either a flurry of purchases or big changes at many of these L.A.-based institutions.

“One of the reasons why community banks exist is the notion of personalized service,” said, Dominic Ng, chief executive of EastWest Bank, a San Marino-based bank that caters to Chinese-Americans.

Ng said that were his bank to be acquired by an institution not catering to Chinese-Americans, he would expect to see its core customer base decline in importance (though he insists EastWest is not for sale).

If anything, EastWest is moving in the other direction going outside the Chinese-American market with the purchase a year ago of Century City-based Prime Bank. Hill said that once a bank hits $3 billion in assets as has EastWest it becomes difficult to expand further without branching out past the niche market. EastWest is now L.A.’s second largest locally based bank, behind City National Corp.

The solid performance of ethnic banks hasn’t escaped the attention of D. Linn Wiley, president and chief executive of Citizens Business Bank in Ontario. Wiley said he has considered the possibility of an acquisition, but so far the cultural hurdles remain too difficult to overcome.

“If a mainstream bank were to acquire an ethnic bank, the ideal situation would be to run it as a separate subsidiary,” said Scott Valentin, a senior analyst who covers EastWest, among other local institutions, for Friedman Billings. “(Success) would depend on how much of the management is going to stay in place. If they were to operate as a separate subsidiary, for instance, there would be good odds.”