After enduring years of substantial losses, L.A.’s banking industry may finally be moving past its credit quality issues.
For the second consecutive quarter, the majority of local banks – including big institutions such as City National Bank and Cathay Bank – exceeded expectations with their earnings, which analysts said was the clearest signal yet that a rebound is underway.
“By and large the banks are all doing much better than they were a year or two ago,” said Aaron Deer, an analyst with New York’s Sandler O’Neill & Partners LP.
While not every bank was in the black, most of those posting profits in the last week or two were helped by drawing down loan loss reserves.
City National and Nara Bank both posted better-than-expected profits after reducing their reserves. Even Hanmi Bank, a Koreatown institution that has been struggling with deep problems in its loan portfolio, surprised investors with net income of $5.3 million – its first profitable quarter in two years – after narrowing its loss reserves by $30 million.
Many bankers remain cautious about declaring a full-blown recovery, though, given uncertainty about the strength of the economy.
Take Cathay, which earned $18.1 million during the last quarter. The strong quarter, its second straight, represents a dramatic turnaround from a year ago, when it lost more than $35 million in the fourth quarter.
But Heng Chen, chief financial officer of parent Cathay General Bancorp, refused to draw overly optimistic conclusions about Cathay’s financial situation based on recent earnings.
“We would characterize it as stable,” he said.
Not every bank was so stable, though.
Wilshire State Bank, for instance, lost $30 million in the fourth quarter after padding its loan loss reserves.
Analysts had predicted a profitable quarter for Wilshire, only to be surprised when the Koreatown bank revealed higher loan losses than anticipated. The bank did not respond to requests for comment, but in a statement after the earnings announcement, Joanne Kim, chief executive of holding company Wilshire Bancorp Inc., said the quarter was merely a bump in the road toward consistent profitability.
“Our fourth quarter results reflect our aggressive actions to resolve lingering credit issues related to commercial real estate loans,” she said. “Following these actions, we have now disposed of the weakest credits in our loan portfolio and have positioned the bank to move forward with more manageable credit costs.”
Wade Francis, president of Long Beach bank consulting firm Unicon Financial Services Inc., said there could be a growing divide between banks that have worked through the bulk of their loan loss problems and those with lingering concerns.
“You’re going to start to see a tale of two cities,” Francis said. “You are going to have some banks that have gotten their exposure down and others that are still struggling
with it.”
Those that do not have to deal with such matters will be better positioned to take market share at the expense of those banks with lingering problems, he added. Regulators will likely allow healthier banks to grow before the rest, which could exacerbate the divide.
“You will have (banks) who are coming out faster than others,” he said. “Banks that have credit under control are the first ones that get out of their timeout and are told you can go out and play now.”
