Got this one off the AOL/SHARK thread: UCBH.
UCBH Holdings: Banking on the Ethnic Chinese
Market
By Craig Schneider 6/30/99
The Year of the Rabbit, or 1999 as it's known to most
Americans, has been good to UCBH Holdings
(NASDAQ:UCBH - news) , the holding company for United Commercial Bank.
Missed that reference to Chinese culture? Well $2.2 billion in assets UCBH is the largest U.S.
financial institution dedicated to the ethnic Chinese market.
On Tuesday, shares of the San Francisco-based company hit a new high of $17.88, an almost 50%
gain from its $12.75 low set in December. Not bad for a non-Internet company that went public
only seven months ago.
Several analysts are beginning to take notice. On June 16, Sutro & Co. initiated coverage with a
"buy" rating and a $25 target price. Last month, Hoefer & Arnett issued a "strong buy" and a $22
target.
Why all the fuss for a company whose market value is only $166 million?
For starters, the company is shifting its emphasis more toward commercial lending and less toward
home loans. That spells higher profits since the interest rates on commercial loans are typically
higher than those for single-family home mortgages. Therefore, the spreads are wider.
Single-family mortgages still represent between 40 and 50% of the total loan portfolio. However, in
three years, UCBH management wants to reduce the share of this business to 20-25% of the bank's
total outstanding loans. Indeed, in the first quarter of 1999 residential originations represented only
21% of total quarterly loan production.
Analysts like where this is going. "We believe the infrastructure is in place for increased growth in
the commercial portfolio," notes Steven Didion of Hoefer, "and, as importantly, that the credit
discipline necessary to control this growth is already present."
UCBH's commitment to maintaining good credit quality is evidenced by the level of
non-performing loans for the most recent quarter, which at 0.37% of loans is the lowest figure
among the Chinese-American banks in California.
One reason: About 50% of loan requests are turned down and the maximum loan-to-value ratio on a
commercial real estate loan is 65%.
UCBH also has no direct credit exposure to Asia.
Management estimates that the current commercial loan portfolio is $287 million and feels the
company could originate as much as $150 million in commercial loans during the second quarter
alone.
Where's all the business coming from? The ethnic Chinese market is one of the fastest growing
population segments in California, according to a 1996 U.S. Census report. Not only do they have
the highest median household income ($40,400) of all ethnic groups in the country, they also have a
tendency for high savings rates and an emphasis on real estate ownership.
What's more, while the Chinese-American banking market is competitive, it's fragmented among a
relatively small number of major players. UCBH has the highest market share among independents
in northern California.
But with only about one-third of the total California population up there, UCBH has recently set its
sights to the south -- where the real business is.
UCBH is fourth among the four major independents in the south that are focusing on this market,
including Cathay Bancorp (NASDAQ:CATY - news) , GBC Bancorp (NASDAQ:GBCB - news) and
East West Bancorp (NASDAQ:EWBC - news) . Management's goal is for 50% of total loan
origination to come from this area over the next two to three years.
While competition does exist for this profitable niche, there are high cultural barriers to entry.
UCBH uses traditional colors in the décor of its banks and has on-site employees speaking both the
Mandarin and Cantonese dialects, which helps customers feel more comfortable and more
effectively execute their business.
By offering these services and familiar environments, UCBH is able to capitalize on the opportunity
that exists from approximately 160,000 Asians that move to California every year.
There are small community banks that have a majority of the loans, says Campbell Chaney of Sutro
& Co., but they "don't have the fire power of UCBH." In other words, they can only make small
loans, so in California's steadily growing economy, "you may quickly outgrow your bank," he says.
"That's where UCBH comes in."
And most of the large commercial banks don't really concentrate on this ethnic marketplace.
UCBH, on the other hand, is playing an aggressive game. Last year, the company opened a
commercial banking/construction lending regional office in southern California (Pasadena) and
hired a team of five SBA lenders from another Asian-American bank in Los Angeles.
And if you're worried about the growth of UCBH in such a regional and ethnic-specific market,
think again. "Theoretically, if it grows to be several times its size, there could be a slowdown," says
Chaney. "But looking as far out as the next several years, I don't think there will be any limit as to
how fast they want to grow." He's expecting earnings growth of around 20% going forward.
Meanwhile, its shares are trading at close to a 30% discount to its peers, or 10 times its 1999
estimate of $1.75 per share. It is trading at 9 times its 2000 estimate of $1.98.
Analysts expect to see the value appreciate once UCBH gets a few quarters as a public company
under its belt and establishes a consistent earnings track record. Through the first quarter, net
interest income is on a pace to grow by over 29%, Chaney adds. Loans increased by 22.8%
year-over-year in the first quarter and profit margins stayed relatively flat.
But it will take some time. Increases in deposit and commercial business fees will unlikely be
enough to offset the lost income from its decreasing mortgage servicing business, Chaney notes.
And UCBH management over the next three years plans to grow the reserve to 1.5% of loans from
the current 1%, which will put it more in line with peer institutions.
Bottom Line:
While a slowdown in the California or U.S. economy won't be a great environment for UCBH, the
company's strong management is proof enough that it can successfully weather the cycles. The Year
of the Dragon (2000) and the Snake (2001) should bring you much fortune.
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