Bank Nurtures Asian Roots

By focusing on select customers, East West Bancorp is showing it can grow at a time when many banks are struggling to find a firm footing.

East West, based in Pasadena, Calif., pays close attention to Asia. It seeks Chinese-American clients and attracts U.S. companies that do business in China. It also finances Chinese companies' expansion in the U.S. through trade finance and commercial loans.

East West has "been smart enough to link to demographics in their ancestral homeland," said William Michael Cunningham, the owner of Creative Investment Research Inc., an advisory firm in Washington with a focus on minority banks. "It's better to be an Asian bank in California than a Hispanic bank in Texas," he said, referring to East West's reach into China itself.

The bank's niche focus has helped it expand at a time when demand for loans around the country has been soft. The strategy is paying off at some other lenders as well.

At SVB Financial Group of San Francisco, which specializes on start-ups and venture capital firms, loans rose 34% from a year earlier in the second quarter. Loan growth also has been strong at Encore Bancshares Inc. and Texas Capital Bancshares Inc., two banks specializing on Texas businesses and their owners, and at East West's Asian-American competitor Cathay General Bancorp of Los Angeles.

With $22 billion in assets, East West was among the top 10 business lenders by volume in the second quarter, according to Keefe, Bruyette & Woods Inc. Its second-quarter income from lending—a tough number for banks to increase in an uneasy economy—rose 30% from a year earlier, to $241 million.

East West's interaction with Borrego Solar Systems Inc. is typical. Since last year, the bank has lent the San Diego solar-power-installation company more than $30 million to finance four power-purchase agreements. Borrego Chief Financial Officer Bill Bush said "it's just much easier" to work with East West because the bank has a deposit-and-lending relationship with Borrego's Taiwanese parent, Walsin Lihwa Corp., and extensive knowledge of the solar market.

Five years ago, most of East West's customers were U.S. businesses importing from China. "Today we see more exporting [to China] than we have ever seen," said East West Chairman and Chief Executive Dominic Ng in an interview. "And going forward...I would expect there will be much stronger interest in Chinese companies investing in the U.S."

East West expands in "concentric circles" from its original niche into new markets, said Keefe Bruyette analyst Julianna Balicka. She calls its growth this year "phenomenal."

East West's commercial-loan book grew 35% in the second quarter from a year earlier, and its profit rose 67% to $61 million.

East West is more profitable than the average bank. Its net interest margin, the profit margin in lending, was 4.7% in the second quarter, up 0.04 percentage point from a year earlier. The average margin at banks contracted 0.15 percentage point, to 3.61%, according to the Federal Deposit Insurance Corp.

East West was founded in 1973 as a savings bank for Chinese immigrants to the U.S. After five purchases of failed banks in the past two banking crises and 10 acquisitions altogether since 1999, it has grown to almost 140 branches in six states across the U.S., and three in China.

For all its successes, East West has had its share of setbacks, too. The string of acquisitions left it with real-estate loans that went sour quickly when the financial crisis hit in 2008.

The bank "made mistakes" in its own underwriting, Ng said. "We thought we [had] made safe construction loans" In 2008, East West had a loss of almost $60 million.

But, unlike most other banks, East West raised capital early and sold bad loans fast.

And it bought United Commercial Bank—including its business in China—from the FDIC when the banking subsidiary of UCBH Holdings Inc. failed in 2009.

"That was just a home run," said Fred Cummings, president of Elizabeth Park Capital Management, an East West shareholder. "They eliminated their largest competitor" in "one of the best FDIC deals" any bank has done in the current financial crisis.

The bank's moves have cushioned it some from investor pessimism about financial stocks. East West shares have dropped 23% this year, compared with a 32% decline in the Keefe Bruyette & Woods index of regional bank stocks.

East West's biggest challenge now? "To stay focused," Ng said, "not to deviate, thinking that we can do in Europe what we can do in China."

Any time a bank is increasing loans so much faster than the industry overall, analysts start to worry about how that lending is underwritten. "You wonder how long it's going to last," said Ms. Balicka of Keefe Bruyette. "But East West, for the most part, has a good track record."

At Borrego, the solar company, Mr. Bush said he wants to do more business with East West. "They really distinguished themselves."