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East West surges into banking mainstream

The Chinese American dynamo has overtaken City National, L.A.'s perennial heavyweight, in terms of market value by absorbing troubled institutions while letting the FDIC bear most of the risk.

February 09, 2011|By E. Scott Reckard, Los Angeles Times
  • Chief Executive Dominic Ng said East West Bancorp was in intensive care in 2008 because of huge losses from construction loans and commercial mortgages. But now, The trend is on our side.
Chief Executive Dominic Ng said East West Bancorp was in intensive care… (Karen Tapia-Andersen,…)

City National Corp. may be the "Tiffany & Co. of the banking business," as one analyst put it, but the gleam of another Los Angeles area bank has caught the eye of Wall Street.

East West Bancorp, a Chinese American dynamo headed by the immigrant son of a Hong Kong bus driver, surged ahead of City National in stock market value for the first time two weeks ago after reporting earnings of $164.6 million last year, about 25% higher than City National's profit.

The accomplishment underscores the rich cultural mix of the Los Angeles area and cements East West's reputation as the most mainstream among dozens of Asian American banks that have sprung up in the region.

"It shows the growing impact of Chinese Americans as part of the fabric of the country," said Wei Li, an Arizona State University professor who co-wrote a 2001 academic study of Chinese "ethnobanks" in L.A. At that time, Li said, East West already was on the fast track to the mainstream.

"But the pace and scope of the changes are beyond [my] expectations," she said.

East West's market capitalization — essentially the stock price multiplied by the number of its shares — was $3.3 billion at the close of trading Tuesday, compared with City National's $3.1 billion. (East West shares fell 9 cents Tuesday to $22.59, while City National dropped 33 cents to $59.54.)

"City National is a very, very good bank," East West Chief Executive Dominic Ng said. "We always looked at them as the leader in Los Angeles. So when we have earnings that are 20% or 30% ahead of them, we have to look at ourselves and say: 'That's pretty good.' "

Analysts said East West, based in Pasadena, was transformed by its November 2009 acquisition of San Francisco's failed United Commercial Bank, which doubled its size to about $20 billion in assets.

The combined bank has proved highly profitable and is by far the largest bank with a core clientele of ethnic Chinese, though Ng has said his strategy was to meet not only the Asian community's cultural and financial needs, but those of Western customers as well.

As it has commonly done after seizing failed banks in recent years, the Federal Deposit Insurance Corp. persuaded East West to take on United Commercial's bad loans, with the FDIC shouldering most of the losses. Last June, East West acquired a smaller failed bank that also had focused on Chinese Americans, Washington First International Bank in Seattle, in a similar loss-sharing deal.

That cushion has helped the bank reduce nonpaying loans to an enviable rate of less than 1% while leaving ample capital in the vaults. That in turn has enabled East West to increase commercial lending and international trade financing while other banks were still focused on cleaning up their own loan portfolios.

With three branches in China, East West also is poised to benefit from any increases in Chinese trade and investment that President Obama promoted last month during meetings in Washington with Chinese leader Hu Jintao.

Chinese regulators in December lifted restrictions they had placed on East West's subsidiary in China during the financial crisis, Ng said.

"For the last 19 years, we've been saying that we aspire to be the financial bridge between the East and West," Ng said. "So the U.S.-China trade, the U.S.-China cross-border investment, those are the type of activities that we are most interested in."

Trade financing makes up about a third of East West's commercial and industrial loans, a book which has impressed analysts by growing $287 million, or 17%, to $2 billion at the end of December from three months earlier. Year over year, commercial and industrial loans were up 32%.

Such loans for business operations are regarded as more stable than real estate lending, which landed banks in trouble during the financial crisis. East West provides them to businesses that open sizable demand deposit accounts — a source of no-cost funds that has been a huge strength for City National over the years.

"East West Bank has changed remarkably over the past couple of years, both through its own efforts to reform its business and due to the two FDIC deals that greatly increased its size," said Aaron J. Deer, a Sandler O'Neill bank analyst in San Francisco.

Deer said he knows of no other medium-size bank that has benefited as much from government assistance in taking over failed banks.

In 2008, with the banking crisis at its peak, East West needed all the help it could get. The bank was "in intensive care," as Ng put it, because of huge losses from construction loans and commercial mortgages. The bank reported a loss of nearly $50 million that year, while City National managed a profit of $105 million.

Moving faster than many banks with similar problems, East West assembled a team to assess the damage and quickly modify or liquidate troubled loans to salvage what they could.

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