The Federal Reserve's aggressive interest rate cuts have been lauded as a way to help stabilize the U.S. economy, but they've also cut into the bottom line at some L.A. banks.
The cuts have reduced profits generated by the difference between the interest paid to the banks for loans, and the interest paid out to depositors. At the same time, several of the banks have seen a spike in loan losses stemming largely from the souring housing market.
The reduced earnings have hammered the stocks of nine publicly traded Los Angeles banks, which have seen their share prices sink to 52-week lows. Among the casualties was East West Bancorp, which last week announced a dramatic fall of 88 percent in first quarter earnings per share compared with the same time last year.
After the Federal Reserve cuts rates, banks are forced to respond rapidly by reducing the interest on adjustable-rate loans, but at the same time they are locked into paying higher interest rates for outstanding CDs.
"The banks are having a hard time passing on those rate cuts to depositors, so margins are getting squeezed by the falling spread between what they make on loans and what they pay depositors," said Joe Morford, an analyst at RBC Capital Markets in San Francisco.
The net interest margin at City National Corp. fell from 4.42 percent to 4.26 percent from last year's first quarter to this year's, which contributed to a decline in first quarter earnings of 22 percent year over year. City National released its first quarter results on Thursday.
The lower net interest income is a particular problem for many banks because net interest margins account for about three-quarters of earnings.
But bad loans are also dragging down earnings. East West reported a large increase in loan losses, jumping to $25.4 million at the end of the first quarter from $5 million in January.
The losses include an anticipated write-off of a $10 million commercial loan as well as four distressed residential construction and land development loans in the Inland Empire.
"Builders in the Inland Empire are having a hard time supporting projects and land appraisals are coming in lower. That is driving higher losses at the banks," Morford said.
The overbuilt housing market in Riverside and San Bernardino counties is evident in the decline in housing permits issued for new single-family homes. Permits plunged 68 percent year over year in February, falling to 508 from 1,597, according to the California Building Industry Association.
East West shares closed at $14.16 on April 16, a decline of 41 percent year to date and down 60 percent over the past 12 months.
Other L.A. banks registered similar slides in stock price. Shares of PFF Bancorp sank to a 52-week low of $4.51, down more than 85 percent from 12 months ago, while troubled mortgage lender IndyMac Bancorp's share price fell to $4.28, a decline of 86 percent from a year ago.
Rock-bottom 52-week share prices also were registered by Hanmi Financial Corp., FirstFed Financial Corp., Cathay General Bancorp, Preferred Bank, Center Financial Corp. and City National.
Dominic Ng, chairman and chief executive of East West, contended that the earnings do not reflect the health of the bank. Despite its exposure in the troubled real estate market of the Inland Empire, East West's construction and land loans in the region are less than 3 percent of its total loan portfolio.
"Our core earnings are pretty much identical to what they were a year ago," Ng said. "Earnings from international trade, fee income, remittances from overseas income, and our consumer banking business they are basically ahead of last year."
East West reacted to the deterioration in its portfolio by boosting its provision for bad loans to $55 million from $9 million last quarter. A year ago, the bank's loan loss provision was zero. The provision is the amount a bank sets aside to cover expected losses.
"If East West had not had the loan loss provisions, earnings this quarter would have been similar to, or slightly lower than, a year ago," acknowledged Brett Rabatin, an analyst at FTN MidWest Securities Corp.
But Rabatin added that a loan loss provision is more than simply a one-time charge. It reflects a deterioration in credit quality that implies the possibility of ongoing losses.
Share prices of local bank companies have
dropped sharply in one year.
IndyMac Bancorp. -85.8%
PFF Bancorp. -85.2%
FirstFed Financial Corp. -70.4%
Preferred Bank -64.7%
Hanmi Financial Corp. -63.8%
Source: Duff & Phelps LLC
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