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Friday, Mar 31, 2023

Bank Shot

Sung Won Sohn is a newcomer celebrity in Koreatown. The former Wells Fargo & Co. economist, considered a keen observer of the Federal Reserve and U.S. monetary policy, has left his home base in Minneapolis to take over as president and chief executive of Hanmi Financial Corp., the largest Korean-American bank in Los Angeles. Under Sohn’s leadership, Hanmi plans to diversify into new products, from cash management to insurance.

Sohn also wants to enter more non-Korean markets (the company already controls a 50 percent market share in Koreatown), and he wants to move the bank away from its concentration on residential real estate loans.

Question: Housing prices seem to be a big issue for you.


It’s a real problem. It’s not only an economic issue it’s a social issue for the nation. The average income folks the police, the firemen, the schoolteachers cannot afford to live in Los Angeles. The other thing is, if someone were to give you a house or your parents were to buy you a house, can you pay property taxes of 1.25 percent?

Q: You have first-hand experience.


I just sold my house in Minneapolis and I can’t buy a house in Los Angeles because it’s so expensive here. A couple of weeks ago, my wife came from Minneapolis to look for houses and we were going to spend two days looking in the Pasadena area. The realtor called and said there weren’t enough houses to look at in our price range ($2 million to $4 million). And the ones we saw were terrible.

Q: You’re talking about the housing market from a consumer’s point of view. How about from the bank’s side? Are you concerned about all the creative loans out there?


I worry about a housing bubble, both commercial and residential.

Q: Why commercial?


There’s a growing disparity between the cost of commercial property in relation to the income it can generate. When the income-to-price ratio gets out of whack, which it seems to have done, there has to be a correction. We might at least maintain the status quo and have a soft landing. But as you know, soft landings don’t occur very often. Hopefully the correction will be slow and gradual. But it can come more rapidly than you realize. Clearly with residential, there is some regional bubble. In Minneapolis, people think I’m buying a mansion when I say I’m looking for a house for $2 to $4 million. They ask me if I need a house that big, how many maids are you going to have?

Q: And you’re telling them that in that price range, you can only get a fixer-upper?


(laughs) Clearly there is some concern.

Q: But you think the local economy still has legs?


The underlying economy is still very strong. Compared to the Bay Area, it’s much more diverse. Here we’ve got low-tech, high-tech, international trade and tourism. If the underlying economy is diversified, then I feel better. When the economic pot spills over, that’s when you get in trouble, which has been the case in Tokyo and in Hong Kong.

Q: Tell me about your stint working in the Nixon administration.


Back then, interest rates were at double-digits, so housing was really in the tank. Looking back, it’s clear that Nixon wasn’t really a financial person. He used to come to our meetings and talk about how he wanted to make sure every American had their own castle and he would bang the table for five minutes and then move on. Every Friday afternoon I wrote a one-page memo summarizing what happened in the financial markets during the week. One day I ran out of things to say so I wrote about the euro-dollar market. And the next morning, the memo came back to me with red ink on it in Nixon’s handwriting: “What the hell is the euro-dollar market?”

Q: How do you compare that period with today?


It was actually better back then than it is now. When interest rates go that high and when inflation goes that high, you know that things will improve, whereas in the current situation it’s the other way around. The best thing we can hope for is a slow and gradual increase in inflation. It may deteriorate more rapidly, and it quite often does. So, to some extent, I feel less comfortable today than I did back then. That’s one of the reasons why I’m trying to diversify the balance sheet of the bank. I want to have people with a variety of talents, not just real estate, and not just focused on Koreans.

Q: How can you ensure growth during a downturn?


The critical issue going forward will be loan losses. In the first quarter, we have loan losses of $61,000 on loan volume of $2.2 billion. Some of my Wells Fargo friends couldn’t believe we had such low loan losses. This bank has very conservative underwriting standards. We insist on a loan-to-value ratio (the amount of a loan compared to the value of a property) of 65 percent. Other Korean banks have higher loan-to-value ratios of 70 to 75 percent and some Chinese banks are as high as 80 percent. It’s because people in this community take great pride in real estate ownership.

Q: Why did you switch careers at the age of 60?


I always say that I came for three reasons: “Opportunity, opportunity, opportunity.” If you look at our loans and deposits, it’s been growing at an annual rate of 25 to 30 percent over the last five years.

Q: What about the concentration in residential real estate?


Non-real estate is obviously going to grow at a faster rate in the future. We’re introducing new products like cash management services, asset-based lending, specialized lending to churches, doctors and lawyers and money management. There’s a lot of money out there but no one in this community is managing it. We need to upgrade existing products like credit cards. Right now, our own employees aren’t even using our own credit card so it’s hard to get them to sell something that they don’t even use.

Q: It sounds like you want to compete with the big banks?


Part of that is necessity. Many of our customers have become large and more sophisticated. And they may try to leave us and move to more mainstream banks if we do not have the right mix of products. So not only do we need sales and services, we need the products to satisfy their needs.

Q: You already have a 50 percent market share in Koreatown. Where do you grow from here?


Actually, almost 50 percent of our assets come from non-Korean markets. We are one of the largest lenders in low-income housing in Southern California. We’ve also had success in serving non-Koreans, like Moroccans or Iranians, mostly because we try to hire outside the community.

Q: There was a lot of management turnover last year when you took the job. What happened?


When I first came on, a lot of the senior management team left. We had about 22 percent turnover, which is roughly the same as at Wells Fargo. The upside is that I hired 11 new senior managers and now we have our team in place.

Q: Why is it so tough to keep people?


The Korean banks have a reputation for board meddling. So it’s been tough to get people to come to a Korean bank. That is one of the reasons I signed a six-year contract. I wanted to have the luxury of building the bank over a number of years rather than being focused on managing the bottom line for the short-term.

Q: There are at least six new banks that have started in Koreatown in the past two years. What’s your outlook for new financial institutions?


It’s very similar to the dot-com boom. Historically, if you look at all these boom and busts, the booms occur because the cost of money is so low. It’s almost free, which was the case with the dot-com bubble. To some extent, that’s what’s happening in Koreatown. If I quit tomorrow, I could raise $40 to $50 million within 24 hours to start a new bank. The problem is that people believe investing in banks is a sure way to make quick money. But there’s going to be consolidation in the Korean market. Right now there are four top local banks Hanmi, Nara Bank, Center Bank and Wilshire Bank. I predict that only two will be left in the next five years, and one of them will be Hanmi.

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