Credit Deterioration Adds Capital Pressure at UCBH

After a severe worsening of credit problems last quarter, and with further weakening expected, UCBH Holdings Inc. is under pressure to boost capital levels — beyond an infusion it has lined up from a big shareholder in China.

The Los Angeles banking company said last week that it lost $93.7 million in the first quarter. The loss brought the $13.4 billion-asset UCBH's tangible common equity ratio to 3.8%, from an already-thin 4.5% at Dec. 31.

China Minsheng Bank Corp. Ltd. has agreed to raise its stake in UCBH from 9.9% to about 19%. The capital infusion is expected to close by June 30. On a conference call last week, Thomas S. Wu, UCBH's chairman, chief executive and president, told analysts that, despite the wider-than-expected loss, Minsheng is "fully committed" to his company.

"Their investment in UCBH is very long-term. It's strategic," Wu said. "They're not buying a stock. … I think they will continue to come forward and [see] no reason … [for] backing off at this point because of our current-quarter performance."

The planned infusion would only boost UCBH's tangible common equity ratio to 4.2%, however. Analysts consider anything below 5% worrisome, and one asked Wu on the call whether the company had considered shrinking its balance sheet. "We're evaluating everything," he replied.

Wu stressed several times that UCBH's regulatory capital ratios are healthy: 12.18% for Tier 1 risk-based capital and 14.73% for total risk-based capital as of March 31. (The company got nearly $300 million from the Treasury Department's Troubled Asset Relief Program.) Still, he said, "we are cognizant of our tangible common capital levels and appreciate its importance to our investors."

The first-quarter loss was largely the result of a $178.5 million loan-loss provision. On a per-share basis, the company lost 78 cents — 54 cents more than the average analyst estimate. UCBH shares have fallen about 30% since the results were released April 24.

In recent quarters, the bulk of UCBH's loan woes were in distressed markets like California's Inland Empire and Central Valley. Though credit rot appears to have stabilized in those areas, nonperforming condominium loans have emerged in Los Angeles and San Diego. Overall, nonperformers rose to 8.01% of total loans, from 5.01% at Dec. 31.

Julianna Balicka, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., said UCBH could lose another 82 cents a share the remainder of the year. This would push its tangible common equity ratio below 3%. "They are very close to needing to think about their capital situation," she said.

Aaron James Deer, an analyst at Sandler O'Neill & Partners, said UCBH's current tangible equity of 3.8% is "more than adequate" to do business but that, "given the nonperformers on the books, we'll continue to see capital erosion in the next couple of quarters as they provide for losses. It's hard to know what the right level is."

James Abbott, an analyst at FBR Capital Markets, wrote in a report published this week that UCBH's Texas ratio — nonperforming assets divided by tangible common equity plus the amount provisioned — jumped to 92% last quarter, from 54% at yearend. A Texas ratio of 100% is considered a warning sign that a company is in danger of failing.

Abbott recommended that UCBH convert the government's preferred shares to common equity, get an additional infusion from China Minsheng and sell nonperfomers "as rapidly as possible."

For reprint and licensing requests for this article, click here.
Community banking
MORE FROM AMERICAN BANKER