Cathay shares trend lower despite expansion, earnings.

CATHAY General Bancorp Inc. is locked in a three-way race to win the hearts and money of the nation's Chinese American community. But despite rapid expansion and successive years of solid earnings, Wall Street has yet to reward the bank holding company's stock.

Since last year, the bank has grown its assets from 27 percent to more than $8 billion, bought back 1 million shares and boosted its dividend. Yet shares of Los Angeles-based Cathay closed April 11 at $32.98; that's 17 percent off a 52-week high reached 11 months ago.

Cathay is the No. 3 bank in Los Angeles County as ranked by assets, behind City National Corp. and East West Bancorp Inc. Yet in the Asian banking niche, it is on pace to be No. 1 nationally. Cathay has 18 branches in six states outside California, along with 34 offices statewide.

Chief Financial Officer Heng Chen likens the race for market dominance against rivals East West and UCBH Holding Inc.'s United Commercial Bank to a marathon rather than a sprint.

"Everyone has more strengths than others in certain ways," Chen said. "East West has stayed home and concentrates more on California, United Commercial was the first of the group to dig in China. As far as we're concerned, our goal is to be a national bank and we've gained share in places where the others haven't."

Indeed Cathay has been on a spending spree, having wrapped up a $9.4 million acquisition of New Jersey's United Heritage Bank on March 30 after paying $23.46 million for Chicago's New Asia Bancorp in October. Moreover, last May it edged out San Francisco-based United Commercial to buy New York's Great Eastern Bank for $56.3 million in cash and stock.

The only snafu thus far involved its aspirations in China, where it met resistance in an attempt to take a $52.2 million, 20 percent stake in Shanghai's First Sino Bank. Chen said mainland authorities moved a little slower than desired, in effect killing the deal.

"It was a setback but in time we found that it would be more pragmatic not to dilute our energy or earnings in a quest to acquire certain targets," said Chen, pointing out that rival United Commercial will take charges

against earnings through 2008 following its $205 million acquisition of Business Development Bank Ltd. in Shanghai.

In hindsight, Cathay's missteps with regulators in mainland China turned out to be serendipitous. Chen says entering the Chinese market via Hong Kong is a "better idea in the meantime anyway."

"Hong Kong regulation is a lot friendlier," he said. "You can do just as much across the water."

Hong Kong's Monetary Authority earlier this month granted a banking license to Cathay, bringing the number of licensed banks in Hong Kong to 138 and clearing the way for Cathay's opening of a full-service Hong Kong branch slated for some time next month.

Analyst reaction

Industry analyst Joe Morford said he isn't concerned about Cathay's stock performance.

He considers the holding company one of the West Coast's top performers and has rated the stock a "sector performer." The company reported 2006 net income of $118 million, or $2.27 a share, up 13.5 percent from the previous year.

"I think everyone is waiting to see who emerges victorious in this Asian American banking niche and Cathay is in a great position," says Morford, who covers West Coast banks for RBC Capital Markets. "This is one of the fastest growing demographics in the country and that can't be discounted."

But the problem for many analysts is the banking sector itself, amid concerns over potential losses from mortgage defaults and uncertainty over the direction of interest rates as the Federal Reserve grapples with the twin problems of a possible looming recession and growing inflation.

Of 10 analysts tracked by Bloomberg, only two rate Cathay a buy, seven a hold and one a sell. However, of those who have "market perform" or "outperform" on the stock, the average price target is $39 per share.

Cathay, like its fellow Los Angeles-based counterpart East West, avoided the risky home loans that have dragged on the earnings of other banks and analysts have pointed out that the Asian immigrant demographic is a lot more cautious with its investments, which helps Cathay.

Chen said the bank's greater focus on the ethnic market--only 40 percent of its loans and 20 percent of deposits are with non-Chinese customers--has made it more attractive to enter other U.S. markets that have traditionally only been served by smaller Asian American banks.

"The broader footprint gives us a better chance to allocate our resources," he said.

Cathay General Bancorp Inc. (Nasdaq: CATY)

Stock Prices

[GRAPHIC OMITTED]

Stock Prices

Quarterly Net Income (millions)

[GRAPHIC OMITTED]

YEAR (Dec. 31)                  2006     2005

Revenue (millions)              $492     $351
Total Expenses (millions)        214      110
Operating Income (millions)      277      241
Net Income (millions)            118      104
Earnings Per Sham              $2.27    $2.05

SUMMARY

Business: Asian-American financial services
Headquarters: Los Angeles
CEO: Dunson K. Cheng
Market Cap: $1.7 billion    Dividend Yield: 1.2%
Total Liabilities: $7.1 billion    P/E Ratio: 14.7
Long-Term Debt: 0