After years of dramatic growth, Koreatown banks are experiencing plummeting stock prices as a wave of nonperforming loans continues to plague their asset quality.
"The perception is that Korean banks take more risks with the loan portfolio and their underwriting standards are not as strict," said Brett Rabatin, analyst at FTN Midwest Research, which tracks Korean banks based in L.A. "But this is a perception and not necessarily the reality."
If Koreatown banks are stereotyped as risky lenders, the biggest banks played to the stereotype in the first quarter, with Hanmi Financial Corp. quadrupling the amount of money set aside to pay for souring loans, which is called a loan-loss or credit-loss provision. Wilshire Bancorp Inc., parent of Wilshire State Bank, reported $22.6 million in nonperforming loans up from $2 million in the same quarter last year.
Both banks recovered somewhat second quarter Wilshire resolved 60 percent of its non-performing loans and Hanmi cut its loan-loss provision to half its amount from the previous quarter.
But Wall Street remains unimpressed. Hanmi traded at about $15 a share last week, down from $23 late last year and Wilshire traded at around $10 a share, down from $20.
"It's humbling," said Joanne Kim, executive vice president and chief lending officer at Wilshire State Bank. "For the past few years, we didn't know any 'down' in our business."
Koreatown's banks as a group are not much different from other banks. In fact, they are profitable and generally well run compared to other community banks. But that's far different from a few years ago, when Korean banks turned in immaculate financial reports and Wall Street patted them on the head. The number of banks in Koreatown more than doubled in recent years.
"Korean banks grew by 35 percent over a five-year period in the early 2000s. Clearly, that could not be a long-term trend," said Sung Won Sohn, Hanmi's chief executive. "But Wall Street rewarded us as if it would be."
One problem is the downturn in real estate. Koreatown banks, whose loan portfolio consists of about 70 percent in commercial real estate loans, flourished as the real estate market boomed and the prime rate a few years ago got as low as 4 percent for the first time in decades. Now with the prime rate back up to more than 8 percent, commercial real estate deals have slowed.
Some see more down than up.
"This is just the beginning," said Daniel Kim, chief financial officer of Saehan Bancorp. "Over the last five years, we've seen rising rent, interest up by 400 basis points and soaring gas prices. People are having a hard time running businesses."
Analysts began downgrading the top five Koreatown banks, whose assets range from $3.7 billion down to $675 million, after the largest one, Hanmi, announced in April that its first quarter bottom line fell 30 percent from the prior quarter's $17.3 million.
The main hit: the bank quadrupled its credit-loss provision to $6.1 million, which went straight to the bottom line.
Hanmi caught up considerably second quarter, reporting net income of $15.3 million, up 17 percent from the previous quarter. The credit-loss provision was cut in half, down to $3.1 million.
The allowance for bad loans the total fund set aside to pay for bad loans hovers around 1 percent of Hanmi's total loans. That's comparable to the national average, but it's slightly higher than the 0.85 percent average for $500 million- to $3 billion-in-assets commercial banks in Los Angeles County for the quarter ending March 31, according to the Federal Deposit Insurance Corp.
Hanmi reported $23.5 million in non-performing loans, up from the previous quarter's $19.5 million when it had jumped 90 percent from the same quarter the previous year. That's 0.7 percent of Hanmi's total loans.
Sohn attributes most of his bank's loan problems to a local automotive dealership that enjoys robust revenue but had over-expanded and is now scaling back the business. The rest of the three asset-based loans that were 90 days overdue and not collecting interest are secure and in the process of being settled, he said.
"Our non-performing loans were near zero for so long," Sohn said. "The $3.1 million in credit-loss provision is an abnormally large number for us and it's directly related to our non-performing loans. We're spending more money on credit monitoring, as we should."
The company has hired a senior vice president dedicated to monitoring asset-based lending and has expanded the credit staff.
In the second quarter, Wilshire, a $2 billion bank company, was able to recoup most of its nonperforming loans that had jumped tenfold to more than $20 million in the first quarter. Its level of nonperformers was down to $8.5 million in the last quarter, which is 0.5 percent of its total loans.
Not all Koreatown banks are struggling with asset quality. Center Financial Corp., for example, with nearly $2 billion in assets, maintained its non-performing assets at $6 million, or 0.37 percent of the total loans.
But all the banks are under the gun on Wall Street. For example, despite its solid performance in the second quarter, Center Financial traded at about $15 per share last week compared to $25 late last year.
"Analysts have a tendency to look at these companies as one, but they're not all going through the same problems," said Donald Worthington, analyst at Barnes Hoefer & Arnett.
Asset quality at Saehan, a $675 million bank, also remained healthy, with its nonperforming loans hovering at 0.5 percent of its total loans.
Saehan traded at about $10 a share last Wednesday, the lowest price since 2004 and considerably lower than $17 late last year.
Kim, Saehan's chief financial officer, said future growth for Koreatown banks may be stifled by too much competition. There are 15 banks servicing Koreatown. "There used to be six, five years ago," he said. "Koreatown is over-banked. They're making riskier loans. Regulators are going to try to get banks to merge. Those who maintain asset quality are going to be the buyers of Koreatown banks."
With an oversupply of lenders, Hanmi and Wilshire have already begun servicing clients outside of Koreatown, mostly Persian communities, and about 50 percent of the new loans go to Iranian, Indian and Pakistani clients.
"We find that these ethnic groups are very conscientious about making payments. These are immigrants who've worked for 20, 30 years to own a property. This is their life. They would do anything to retain their properties," Sohn of Hanmi said.
Meanwhile, the Koreatown economy remains strong, supported in part by South Korea, the 11th largest economy in the world.
The Korean government recently lifted an overseas investment cap of $300,000 and individuals can spend up to a $1 million in real estate overseas. The country is also in line to be accepted as one of about 30 countries whose citizens are not required a temporary visa to travel to the U.S. Both factors are expected to keep money flowing into L.A.'s Korean community.
"This is a very wealthy community," said Sohn, who served as an economist at Wells Fargo for 31 years before taking his post at Hanmi in 2004. "I can tell you that there is more money here than what I saw at Wells Fargo. These are people with tens of millions of dollars."
As the Korean immigrant community has matured, so have the banks. For example, for every dollar of revenue, Hanmi and Wilshire spend about 43 cents to produce that revenue. Center spends about 52 cents and Saehan 64 cents. Most community banks perform at about 65 percent efficiency ratio.
On average, a healthy, earning bank produces more than 1 percent return on assets and 15 percent return on equity. Most Koreatown banks are exceeding these performance measures, with Wilshire at 1.5 percent return on assets and 18 percent return on equity and Center at 1.4 percent return on assets and 17 percent return on equity. Hanmi is at 1.6 percent return on assets and trails behind at 12 percent return on equity.
"They're generally well-run companies," Rabatin said. "I think the whole group will eventually rebound. Unless we see a commercial real estate bear, asset quality at these banks shouldn't continue to deteriorate."
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