High Growth, Low Returns Found at Minority Banks
By Katie Kuehner-Hebert,
Wednesday, September 19, 2007 .
Banks that target minority groups, particularly Hispanics and Asian-Americans, are reporting asset growth well above the industry average, largely because of an influx of immigrants.
However, on average these banks are less profitable and less efficient than mainstream ones, according to a report published last week by Creative Investment Research Inc., a Washington consulting firm that focuses on minority banking.
Assets at minority-owned banks are on pace to increase by an average of 17.43% this year, compared with the overall industry average of 6.38%, according to the report, which cited data from the Federal Deposit Insurance Corp. and other sources.
William Michael Cunningham, the consulting firm's president and chief executive, said the trend reflects both the increased number of start-ups targeting Hispanics — about a dozen have opened since the end of 2005 — and the continued asset growth at new and existing Asian-American banks.
Mr. Cunningham attributed the asset growth at the niche banks mainly to the surging Hispanic and Asian populations. The Hispanic population increased about 26% between July 2000 and July 2006, to 44.3 million, according to Census Bureau data, while the Asian population grew 45%, to 14.9 million.
But he also said he believes it is easier for these banks to attract ethnic groups, because they hire people who speak the group's language, and they have flexible underwriting policies to more accurately reflect the creditworthiness of their customers, particularly immigrants with no established credit histories in the United States.
Many immigrants have just checking accounts at mainstream banks, and language barriers or conventional underwriting policies may be stopping such customers from taking out personal or business loans or investing in securities with the banks.
Jose Reyna, Zions Bank's regional president for Utah and Idaho, said he does not agree that minority-owned banks necessarily serve minorities, paticularly immigrants, better than mainstream banks.
"We have strict credit policies and a very conservative portfolio, but we believe [minorities] deserve a very thorough look...and we're willing to support them for both personal and business loans," he said.
The $10.8 billion-asset East West Bancorp in Los Angeles caters to Asian-Americans, and its assets have increased an average of 21% a year for the last decade, said Dominic Ng, the chairman, president, and CEO of the company and its East West Bank.
Much of the company's asset growth has come from the fact that many Asian-Americans tend to own businesses or buy commercial real estate and bank with East West as commercial customers, he said.
Still, not all of the growth in recent years can be attributed to an increase in Asian-American customers. Mr. Ng said that his company also is gaining non-Asian customers, particularly business owners who import and/or export goods and services and need its trade finance services.
"We have done well in serving minority businesses and have applied that same approach to mainstream businesses," he said.
Dan Hudson, a consultant to start-up banks, said that minority-owned banks that also target the general population tend to do better than those with a strict ethnic focus. He cited the $210 million-asset United Americas Bankshares Inc. of Atlanta, which is Hispanic-owned, and the $270 million-asset Harbor Bankshares Corp. of Baltimore, which is African-American-owned, as minority-owned banking companies that generally have performed better than average.
On average, though, minority-owned institutions have not performed as well as the industry as a whole, largely because they tend to be smaller and less efficient. As of June 30 the efficiency ratio for women- and minority-owned banks was 91.36%, versus the industry average of 56.52%.
The report also showed that the ROAs of these banks has dropped of dramatically in the last 18 months, though Mr. Cunningham was quick to attribute this to an increase in start-ups targeting minorities. (There were 225 minority-owned banks and thrifts as of June 30, versus 190 at the end of 2005.)
Return on assets at minority institutions averaged 0.09% at June 30, compared with 0.78% at the end of 2005. For all FDIC-insured institutions, the ROA was 1.21%, compared with 1.3% at the end of 2005.
Mr. Cunningham said that he suspects that the minority start-ups mature, their returns will move closer to the industry average.
Broken down by ethnicity, Native American banks performed the best, with an average return of 0.84% at June 30. The average was 0.22% for Asian-American banks, 0.11% for Hispanic banks, and negative-0.6% for African-American banks. (For the new category of banks that have minority boards and serve African-American communities but are not majority owned by African-Americans, the average was 0.52%.)
Mr. Cunningham said that Native American banks topped the list because of strong revenue from casinos.
Banks owned by African-Americans have not had as strong as demographic growth as the others and have struggled with cost control, he said.
Though the increased number of start-ups may have skewed minority banks' performance ratios, chargeoff ratios for the group on average have been better than the industry as a whole, the report said.
Net chargeoffs as a percentage of average loans totaled 0.21% at minority institutions as of June 30, compared with the average of 0.47% for all FDIC-insured institutions.
Mr. Cunningham said that nonperforming assets at minority-owned banks may be in line or even higher than the industry average, but the banks tend to work with their customers much longer in resolving credit problems, so chargeoffs tend to be lower.
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