L.A.’s two premier Chinese-American banks are suddenly in the front of a new race for dominance of the growing sector.
Southern California’s largest Chinese-American institution, East West Bank of Pasadena, made a bold move with the acquisition of United Commercial Bank, a San Francisco institution that was shuttered earlier this month.
The deal made it not only the largest bank headquartered in Los Angeles but the largest Chinese-American bank in the country.
Not to be outdone, rival Cathay Bank of Los Angeles, believed to have made an unsuccessful bid for United Commercial, filed papers to raise $200 million through a securities offering, money that could be used to make a major acquisition.
Indeed, after the collapse of United Commercial, which had been the largest Chinese-American bank in the country, East West and Cathay are now Nos. 1 and 2, respectively, in the nation’s growing ethnic Chinese banking sector.
“In the past, it was always a three-bank race” in the Chinese-American community, said Joseph Gladue, an analyst with B. Riley & Co. who follows several of L.A.’s Asian-American banks. “Now, East West and Cathay are the two big, 800-pound gorillas in the space.”
With an estimated population of more than 400,000 Chinese-Americans, Los Angeles County is home to one of the largest Chinese-American communities in the United States. The population, which is projected to more than double over the next few decades, has attracted a number of banks to the fold.
A handful of new Chinese-American banks have cropped up recently, such as Mega Bank in San Gabriel, founded in early 2008. Royal Business Bank in downtown Los Angeles, which was started late last year, is getting ready to open its third branch next month. But none in the increasingly crowded sector is anywhere near the size of East West and Cathay.
East West, owned by East West Bancorp Inc., now has assets in excess of $19 billion after the acquisition of United Commercial. It surpassed downtown L.A.’s City National Bank, which had been the largest locally headquartered bank.
Cathay, a subsidiary of Cathay General Bancorp and Southern California’s oldest Chinese-American bank, has $11.7 billion in assets.
KT Leung, vice president of the Chinese Chamber of Commerce of Los Angeles, said it is a shame to see a reduction in competition among the Chinese-American banks, but believes business customers will not suffer for it.
“I think East West Bank has the experience to service United Commercial Bank’s customers,” he said.
The competition heated up when regulators closed United Commercial on Nov. 6 and the Federal Deposit Insurance Corp. immediately sold the assets to East West. But the overnight acquisition was actually several months in the making.
United Commercial, founded in 1974 to serve the San Francisco Bay Area’s rapidly growing Chinese immigrant community, was hurt during the economic downturn by losses on loans made during the housing boom.
In early September, the bank’s problems began piling up. Regulators hit United Commercial with a cease-and-desist order directing the bank to overhaul its management and submit a plan to stop bleeding capital. Weeks later, the Securities and Exchange Commission opened an investigation into the bank’s misstated financial reports, which ultimately led to the resignations of several top executives, including Chief Executive Thomas Wu.
Meanwhile, a handful of banks began jostling behind the scenes to take over United Commercial’s assets should the institution fail. Both East West and Cathay were publicly cited as the leading contenders for an acquisition.
East West began privately contacting its top institutional investors to see if they would be willing to commit capital to fund the acquisition.
“The minute we heard that there may be a situation where the FDIC may have to put them out for bid, we just stepped up,” said East West Chief Executive Dominic Ng.
The bank was able to quietly secure commitments for $500 million from its shareholders, whom Ng described as very supportive.
FDIC spokesman David Barr said the agency actively sought bidders for the bank’s assets, including 63 branches. The agency targeted not only bidders large enough to take on the assets but ethnic banks, given United Commercial’s focus.
“We try and, if it is a minority-owned institution, contact other minority-owned institutions to try and get them to bid,” he said.
The agency reached out to 51 banks, and seven submitted final bids. Barr said the FDIC would not disclose the names of the losing bidders, and Cathay declined to say whether it submitted a bid.
“We are not going to comment,” said Heng Chen, chief financial officer of Cathay.
However, analysts believe that the bank likely made a bid.
“I would suspect that they probably were interested as well,” said Gladue, noting United Commercial had many branches and large assets that could be picked up on the cheap.
United Commercial had 0.8 percent share of deposits in Los Angeles County as of June 30, making it the 21st largest bank in the region.
From East West’s standpoint, the acquisition made financial sense, analysts said.
East West, which had 69 branches located primarily in California, nearly doubled its footprint and obtained a coveted Chinese banking license through the deal. The license will allow East West to make loans and take deposits in China.
Ng said there are no immediate plans to close branches and there will only be minimal layoffs. What’s more, the acquisition comes with little risk since the bank entered into a loss-sharing agreement with the FDIC.
That is just the type of deal for which Cathay is on the prowl.
Six days after United Commercial’s failure, Cathay filed a so-called shelf registration with the SEC to raise as much as $200 million in either debt or equity in the future. The move came just weeks after the bank raised $113 million in a stock offering.
In the shelf-registration filing, the bank said it “may engage in FDIC-assisted transactions.” Chen would only say that it’s hard to plan for an acquisition of a failed bank, but Cathay is interested if an opportunity arises.
The opportunities could be plentiful. More than 100 banks have failed in 2009 and some analysts predict hundreds more will be closed in the coming years.
A potential acquisition need not be in the ethnic banking sector. Both Cathay and East West have a significant number of non-Chinese-American clients.
East West, in particular, is looking to expand into the mainstream banking industry, and it is continuing to look at acquisition opportunities, though Ng said, “(For) the next six months, we probably will not touch anything.”
That could leave the door open for Cathay, analysts said. Even within the Chinese-American sector, the bank can grow its market share by poaching customers from mainstream institutions.
“There are still customers to be had,” said Chris Stulpin, an analyst who follows East West and Cathay for D.A. Davidson & Co.
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