Single Has Value For Some Banks

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As most customers find a smaller menu of bank options, in L.A.’s Chinese-American community there remains a whole buffet to choose from.

There’s been a flurry of bank mergers over the past few years, but Chinese-American banks have been sitting it out. Los Angeles County is home to a whopping 20 Chinese-American lenders, a number that’s barely changed amid an otherwise active deal environment.

With Chinese money pouring into Southern California and bank directors in no rush to relinquish their prestigious posts, executives and investors say the status quo seems to be working just fine. That’s in spite of new regulations that have made it more expensive for small banks to remain independent.

“Eighty percent of Chinese bank customers are Chinese,” said Steve Hong, chief executive of United Fabricare Supply in Compton and a former vice chairman of downtown L.A.’s California Business Bank. “They are able to survive with just their own people. It seems to me they are happy with the current situation.”

And they’re not just surviving, but growing. Ed Czajka, chief financial officer of Chinese-American lender Preferred Bank in downtown, said the influx of Chinese people – and cash – into Los Angeles gives these banks a way to boost business without buying it.

“There’s still a lot of organic growth potential because of the Chinese migration,” he said.

Culture clash

Los Angeles County is home to 60 banks and thrifts, down from 77 in 2010. Over the same time period, the county has gone from eight Korean-American banks to six. But the number of local Chinese-American banks has been remarkably static.

There were 22 four years ago and 20 today. Combined, their assets have grown from $39 billion to $49 billion since 2010, slightly faster than the rate of growth for local banks overall.

Unlike their Korean-American counterparts, five of which are among the 25 largest banks in the county, many of the Chinese-American banks are still relatively small. Most have assets of less than $1 billion.

But despite their small size, Czajka said one major factor behind the lack of consolidation in the Chinese-American banking world is simply that there aren’t many obvious unions to be made.

“I think there’s some reluctance because there’s not a lot of strategic deals left to be done,” he said.

So-called mainstream banks typically aren’t interested in buying ethnic lenders, and bigger Chinese-American banks are in no rush to buy smaller ones. Pasadena’s East West Bancorp Inc. acquired Houston’s MetroCorp Bancshares Inc. in January to expand its presence in Chinese communities in Texas, where it only operated one branch prior to the deal. But that might have been the last obvious strategic deal.

A Chinese-American bank executive who spoke on condition of anonymity said a bank such as Chinatown’s Cathay Bank, which has essentially full coverage of the Chinese neighborhoods of Los Angeles, the Bay Area, Seattle, New York and Chicago, is running out of new fertile ground.

“If you’re Cathay, what do you do?” the executive said. “They’re in every strategic market. That’s also why you see the Chinese banks trading at somewhat lower valuations.”

The executive said that many Chinese-American banks, including his own, are high-touch businesses with a lot of personal contact. Longtime customers have a direct line to his bank’s president and chairman – and they use it often.

These banks don’t want to risk alienating core customers, many of whom are very active given the economic boom in Chinese communities. And a merger with another local Chinese-American bank might do that.

More support for upholding the status quo might also come from bank directors. Consolidation naturally results in fewer such director spots. These are largely ceremonial roles, but Hong said they’re a big deal in the Chinese-American bank community.

“A board of director position is highly respected by Chinese people,” he said.

John Ahn, president of West L.A. investment bank B. Riley & Co., said people shouldn’t underestimate the desire of these directors to keep their titles.

“A lot of things aren’t driven by pure economic reasons with these smaller banks but by ego,” he said.

No urgency

Southern California’s most recent proposed bank deal, the planned purchase of Pasadena’s OneWest Bank by Livingston, N.J., lender CIT Group, joined two banks backed by Wall Street veterans, including former Merrill Lynch Chief Executive John Thain and hedge fund managers George Soros and Steven Mnuchin.

Given the deal-making DNA of the key individuals, a transaction of some sort was almost inevitable.

On the other hand, Chinese-American banks tend to have more patient shareholders who aren’t on the hunt for deals. New regulations that came with the passage of the Dodd-Frank Act have certainly made it more expensive to run a smaller bank, which cannot afford the army of lawyers and compliance experts a big bank can, but things aren’t so onerous that investors feel pushed into mergers.

“Their investor base doesn’t have the same motivation of driving shareholder value through larger-type transactions such as M&A,” Ahn said.

Instead, Chinese-American banks are compensating by pushing harder to do more business with their core clientele. Take Hong, the former bank director, for instance.

“I recently got a loan from a Chinese bank for my company,” he said. “They are so aggressive, trying to make business loans.”

The chief executive of a local Chinese-American bank, who agreed to speak only off the record, said that unlike bank investors across the country, many Chinese-American bank owners aren’t itching to cash out just yet. He said that’s partly due to the fact that several Chinese-American lenders started up in 2005 and 2006 – close enough to the crash that they didn’t have time to accumulate too many bad loans.

While other bank executives and investors spent the last few years climbing out of a hole and are now ready to take some money off the table, Chinese-American bank executives and investors want to wait and capture more organic growth. That’s the result of both fortuitous timing and also the generally conservative nature of Chinese-American banks.

With money both from mainland Chinese and Chinese-Americans being pumped into Los Angeles at a furious pace, Chinese-American banks have no urgent rush to go out hunting for new business.

So as other institutions merge to try to optimize themselves for the next cycle and establish a presence in the next hot market, Chinese-American banks and their customers would rather stick with what – and who – they know. And while plenty of lenders were wiped away during the last crash, Chinese-American banks never left.

“Chinese banks are healthy,” Hong said. “No matter what happens, they will survive.”

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