---
Heard In California:
Some Bargain Hunters Now Favor
2 Banks Serving Chinese-Americans
----
By Brenda L. Moore
Fears of rising interest rates and recession are prompting investors to make
heavy withdrawals from financial-services stocks. But some are already
banking on bargains that they think could pay off when the group returns to
favor.
Among the picks are two relative newcomers to the stock market: East West
Bancorp and UCBH Holdings, a pair of California banks catering to the
Chinese-American community.
"They're undervalued" compared with their peers, and "their loan qualities are
much higher than average," says Scott Hood, portfolio manager at First
Wilshire Securities Management in Pasadena. He won't disclose his firm's
stakes in either bank, but says First Wilshire has been building positions in
both. "They should have higher internal growth than other banks," he says.
"And I think people aren't really pricing in the opportunities for more business
within the Pacific Rim," not to mention growth of the Chinese-American
community.
While East West is based in San Marino, near Pasadena, and UCBH has its
headquarters in San Francisco, the two have a lot in common. Both have
been showing double-digit earnings growth. Both are trading at only
single-digit multiples of expected earnings. They even have similar
backgrounds. Both were founded in the 1970s. Both changed hands in 1998,
when Indonesian owners sold them in management-led buyouts as they
scrambled to raise money because of the Asian financial crisis. Shares of
UCBH began trading publicly in November 1998, joined by East West in
February this year.
Both also changed their charters in the past few years, converting from thrift
institutions to banks and thus gaining greater flexibility in the kinds of business
they can do. As a result, home loans are becoming less substantial parts of
their business as they shift toward more-lucrative areas such as commercial
and construction lending.
The conversion is largely responsible for the strong earnings gains both banks
have been racking up. Shareholders and analysts acknowledge that the
growth rates will slow as the changeovers recede into the past. Still, both
stocks trade at discounts to the Standard & Poor's 500 and even to their
community-bank peers.
The S&P gap reflects the anxieties dragging down the entire financial-services
sector: prospects for rate increases, inflation, an increase in bad loans if the
economy worsens. The peer gap, analysts and holders say, is partly because
the companies are new to the Street and partly a result of the banks' focus on
a niche market. That concentration makes them less attractive to potential
acquirers, which seem more likely to pursue partners with a broad, traditional
customer base.
Martin Friedman, an analyst at Friedman Billings Ramsey, an Arlington, Va.,
brokerage firm that handled the buyout of East West, says a focus on the
Asian community should earn the banks a premium, not a discount. Mr.
Friedman, who follows both East West and UCBH, cites data that would
seem to make Asian-Americans a wise target market. Asian Americans
account for 11% of California's population and the figure is projected to grow
to 15% by 2010, according to the state Department of Finance. The
department also says that median household income for Asian Americans is
higher than for the overall population, at $52,700 compared with $46,400.
East West and UCBH aren't the only banks competing for those customers,
of course. Among the 15 biggest California banks by assets, four target
Chinese-Americans, according to Steve Didion of Hofer & Arnett, a San
Francisco brokerage firm. UCBH is No. 10, with assets of $2.2 billion. East
West is 13th, with $2.1 billion. Rounding out the list are two Los Angeles
banks: Cathay Bancorp at $1.8 billion and GBC Bancorp at $1.7 billion.
While East West and UCBH may have few potential suitors in the broader
market, some look at them as a good match for each other, marrying one's
strength in Northern California with the other's position in the south of the
state. Executives of both banks acknowledge some attraction, but indicate
that's as far as it goes at this point.
Here are a few details on each bank.
East West Bancorp
East West has 22 branches, mostly in Southern California. It is expected to
add eight more in January through its pending acquisition of American
International Bank in Los Angeles. That deal would follow its May purchase
of First Central Bank, Los Angeles, and fits its strategy of growing both
internally and through acquisitions.
Its retail banking clientele is almost entirely Chinese or Chinese-American, but
for its commercial-banking business the figure is only about 50%, says Chief
Executive Dominic Ng. The company is doing a growing business in trade
finance, says Mr. Ng.
East West is "viewed as the company of choice when dealing with the Pacific
Rim business community," notes Mr. Hood.
Nine-month earnings reported last week were 88 cents a share, up 80% from
a year earlier. Analysts surveyed by Thomson Financial/First Call predict
per-share earnings of $1.15 for the full year, and $1.39 in 2000 -- a 21%
increase.
East West shares closed Tuesday at $11.50, and Derek Derman, an analyst
at Wedbush Morgan Securities in Los Angeles, says they could climb to
$14.50 in 12 months. "We believe that East West has fallen through the
cracks and represents a true value in the market," Mr. Derman says. "We
anticipate that once more research analysts and investors 'discover' the stock,
its price will appreciate."
UCBH Holdings
UCBH, the holding company for United Commercial Bank, has 27 offices
around the state, with its highest concentration in the Bay Area. Its clientele is
predominantly Chinese-American.
The stock closed Tuesday at $19.625, about 5% below its 52-week high of
$20.625. Bullish analysts predict it could hit about $25 within 12 months,
given increased coverage by Wall Street firms, projected growth rates and its
record.
Last week the company reported that earnings were up 64% for the first nine
months. The climb was fueled by an increase in interest generated by the
growing commercial-loan portfolio. Analysts project full-year earnings at
about $2 a share, about 59% above 1998.
Thomas Wu, the bank's chief executive, says he's comfortable with that
estimate and that the bank's five-year plan calls for doubling the figure by
2004.
David Einhorn, whose Greenlight Capital, New York, held 203,000 shares, a
2% stake, as of June, says UCBH hasn't given investors any reason to doubt
its projections so far.
"These guys gave initial expectations to everybody that seemed optimistic, and
they have blown through them," says Mr. Einhorn. "The quarter that they
announced {last week} was about as close to a perfect quarter as anything
I've ever seen."
UCBH remains below bank averages in its return-on-assets and its provision
for loan losses. But it has been improving in both areas as it makes the
transition to a commercial bank.
So far, UCBH has "done nothing but surpass expectations," says Steve
Rayner, an analyst with Pilgrim Bank & Thrift Fund in Phoenix, which had a
2% stake in June. "They've improved margins, are growing their loan portfolio
at a very nice clip, and earnings are growing."
So, given such glowing reviews for East West and UCBH, when will the
markets respond?
"You don't know when; you can't point to the exact catalyst," says Mr.
Friedman, of Friedman Billings Ramsey, but "eventually people will be
underweight in financial stocks in their portfolios," will see that "they're the
cheapest thing in the marketplace, and they'll start buying them." |
