Sung Won Sohn, the president and chief executive officer of Hanmi Financial Corp. in Los Angeles, visited New York this month to suss out the local Korean communities.
The $3.8 billion-asset Hanmi is the largest of the country's Korean-American banking companies, and entering the New York area is among its top priorities, Mr. Sohn said.
Hanmi would like to buy a bank there that targets Korean-Americans, but it may have to settle for buying or building a branch instead. History has shown that Korean-American-owned banks prefer to stay independent, and finding one willing to sell — despite the mounting earnings pressure on the sector — could be a challenge.
"From an economic perspective, consolidation should have already occurred," Mr. Sohn said in an interview during his New York visit. "But it's probably going to take more time and more pain."
Analysts and bankers have been saying for years that there is an oversupply of Korean-focused banks — especially in Los Angeles, where there are at least a dozen — and that they should consolidate. But strong earnings growth and consistent returns on assets and equity, all well above industry averages, made it easy for the companies to justify staying independent.
Now growth is becoming more difficult to achieve. Slipping credit quality hampered their performance in the first quarter, and competition from mainstream banks and an influx of start-ups is squeezing margins. High employee turnover is constraining growth further, bankers and analysts say.
But even though they say consolidation should happen, they are skeptical about whether it will.
Benjamin Hong, the president and CEO of the $676 million-asset Saehan Bancorp in Los Angeles, said the prestige of being a bank director in the Korean-American community is a major barrier in getting bankers to sell.
"It's a status symbol, like a Mercedes-Benz," he said.
Lana Chan, an analyst at Bank of Montreal's BMO Capital Markets, wrote in a report issued June 8 that consolidation would be "challenging," because there are more buyers than sellers in this niche.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, said he thinks only the small banks might consider selling.
"They may get themselves into too much trouble," he said. "They have been able to move market share by taking some of the credits that the other banks didn't want, by giving better prices. But if asset quality issues continue, they'll decide to sell."
Concerns about credit quality throughout the Korean-American banking sector have hurt the companies that are publicly traded. James Abbott, an analyst at Friedman, Billings, Ramsey & Co. Inc., said that according to his company's data, their weighted average price has dropped 27% this year, while the weighted average price for Chinese-American banking companies has climbed 7%.
Both sectors generally have outperformed mainstream banking companies in recent years, but Mr. Abbott said investors "are not nearly as concerned about credit risk at the Chinese banks," because they tend to have more centralized credit processing.
Each of the four largest Korean-American banking companies — Center Financial Corp., Nara Bancorp Inc., Wilshire Bancorp Inc., and Hanmi — reported trouble with three to five sizable loans in the first quarter, he said.
Bankers insist that there is no emerging trend of deterioration, but Mr. Abbott said: "I think it's fair to say investors are still fairly skeptical. It just seems like too much of a coincidence."
Analysts say they expect the Korean banking companies to report improved asset quality in their second-quarter results.
"The inside ownership on these boards is extremely high. They take a lot of pride in what the stock has done and how results look," Mr. Rabatin said. "I think the results this year have been somewhat embarrassing for them in their local community, so they're certainly all working feverishly to manage the issues of asset quality and regulatory oversight."
But several analysts said that too many companies are focused on the Korean niche for all of them to thrive — a factor that could nudge some toward selling.
An influx of start-ups in 2005 intensified the already tough competition for deposits and loans, Mr. Abbott said. "There's excess capacity in the Korean-American space for the moment. The Korean-American business economy will probably grow into that, but they've built a 14-lane highway when they only need eight lanes right now."
When struggling to improve shareholder value, Korean banking companies seem to feel less pressure to sell than their mainstream counterparts, Mr. Abbott said.
"I think the culture is to grow, grow, grow," he said. "I'm not sure when times are tough the default answer is, 'We need to take care of shareholders.' "
Saehan's Mr. Hong said the culture is different than the one at mainstream banking companies, because of inside ownership. "At mainstream banks, the ownership and management are quite separate," he said. "At Korean banks, ownership and management are fairly closely tied."
Ms. Chan wrote in her report that immigration and population growth make the Asian-American banking niche attractive. That segment of the population, which had 11 million people in 2000, is expected to grow to 14 million by 2010 and 18 million by 2020, far exceeding the expected growth rate for the overall U.S. population, she wrote.
The Korean banks' small-business focus dovetails well with their particular target, because Korean-Americans have the highest rates of business ownership — one in eight — of any ethnic group, Ms. Chan wrote.
Another factor in their favor: In January, South Korea tripled the limit on overseas investment, to $3 million a person. Ms. Chan wrote that the higher limit should continue to fuel a trend of investing in U.S. real estate.
Still, she wrote that investor caution is warranted, because of the credit-quality issues, the continued competition from start-ups, and employee turnover.
Mr. Sohn said turnover is a problem for every Korean-American banking company. "There aren't enough people to go around, so there's some musical chairs going on."
The bankers said that start-ups and mainstream banking companies trying to penetrate the Korean community are partly to blame, but that even the older Korean companies, being growth-minded, are poaching one another's employees.
Mr. Hong, who formerly ran Hanmi and Nara, has been on a hiring spree since he came out of retirement in January 2006 to lead Saehan. In the first quarter its head count grew 50% from a year earlier, to 197 people. "We've been more on the receiving end than the losing end," he said.
Though some Nara employees followed Mr. Hong to Saehan, he said he did not specifically target his former employer. "I tried to invade equally."
His goal is to increase Saehan's assets to $1 billion by the end of next year to achieve economies of scale. Saehan has nine branches and plans to add two in Los Angeles within a year. It also has five loan offices and plans to add three: one this year in New York and two next year in markets that have yet to be chosen.
The four largest Korean-American banking companies, all in Los Angeles, also intend to expand — and analysts say that intent makes those companies less likely candidates for consolidation.
Ms. Chan detailed their growth plans in her report.
The $1.9 billion-asset Center, which had a memorandum of understanding lifted May 17, is planning to open two or three branches and is eager to find what would be its first acquisition. The $2 billion-asset Nara is looking for acquisitions outside California and plans to add branches and salespeople. And the $2 billion-asset Wilshire plans to add a branch in New York and two in the Inland Empire region of California.
Mr. Sohn said that in addition to New York, Hanmi would like to have branches in Atlanta, Seattle, and the San Francisco Bay Area. However, the fact that "everyone has the same idea" makes it even more of a challenge to find a buying opportunity.
He aims to triple Hanmi's asset size within 10 years. His company has opened six loan offices since last summer, when a memorandum of understanding that had restricted its growth was lifted. It opened an Orange County branch in April and plans to open two more in California this year and three or four more next year.
Mr. Sohn said Hanmi is overcapitalized, with about $50 million available to fund its growth. Nevertheless, "we have to pace ourselves, because we may want to make some acquisitions."
