Conservative approach brings mixed results for Cathay Bank. (Corporate Focus).

LAST year was a good one for Cathay Bancorp, considered by many to be the dean of ethnic Asian banks in Los Angeles. Aided by lower interest rates, Cathay last year posted a 14 percent jump in net income, to a record $48.7 million, or $2.69 a share.

This year, the challenge will be to keep earnings at that same level. Like other lenders, Cathay benefited from a series of Federal Reserve rate reductions during 2001 that lowered borrowing costs and helped improve the spreads on money being lent out.

After a key interest rate was cut again in November, however, a new concern came to the fore -- that with rates already so low, the banks' overall lending costs, including overhead, couldn't shrink fast enough to match declining interest income.

At Cathay, where operating efficiency has been a hallmark since its founding in 1962, net interest margins held up pretty well in the fourth quarter. They actually expanded, to 4.24 percent from 4 percent.

Net income rose to $12.1 million, or 67 cents a diluted share, for the fourth quarter, versus $11.5 million (64 cents) for the like year-earlier period.

Brett Rabaton, an analyst with FTN Financial, is an admirer of Cathay Chairman and Chief Executive Dunson Cheng. He expects Cathay to earn $2.95 a share in 2003. Nevertheless, he said, Cathay would not be immune to margin pressure in 2003.

"Rates have gotten to a level where it's hard to compress core lending costs any further," said Rabaton, who rates the stock an "outperform."

Cathay officials say they've worked to optimize the bank's mix of interest-earnings assets, and to obtain lower cost of funds.

"These efforts should help reduce our exposure to declining interest rates and help us to be well positioned in the event interest rates move upward," said Elena Chan, the bank's chief financial officer.

Analysts have confidence that Cathay, under Cheng's leadership, won't hurt its own cause.

"Cathay is extremely well managed, and probably the most seasoned of the Chinese-American commercial banks," said Steve Didion, president of Hoefer & Arnett, an investment banking firm in San Francisco.

At a time when consistency and reliability are being sought out by investors, Cathay's stock doesn't seem to demand the price multiples that some of its peers do.

At a recent price of $38.10, Cathay shares trade for about 14.1 times trailing 12-months earnings. By comparison, similarly sized East-West Bancorp had a P/E of 17, and UCBH Holdings, based in San Francisco, had a P/E of 22.4.

Cathay hasn't been as aggressive on the acquisition front, said Didion, and it hasn't leveraged its deposits into loans as fully as East-West or UCBH.

"Also they haven't put forth the same effort from an investor relations standpoint," Didion said.

That impression is seconded by Scott Hood, president of First Wilshire Securities Management Inc. in Pasadena, The firm has owned Cathay shares in the past, but in the late 1990s, it chose to invest in UCBH and East-West instead, despite Cathay's then-higher multiples.

"Our impression at the time was that Cathay was the more conservative firm and they weren't going to be making acquisitions or adding new products quite as rapidly as the other ones," Hood said.

While Cathay's conservatism may have hurt it on some fronts, it's also helped it avoid pitfalls. For instance, a number of ethnic Asian banks have tried to diversify their customer base in recent years, with mixed results. The diversification strategy worked well at San Marino-based East-West, contributing to its rapid growth. But at GBC Bancorp, parent of General Bank in L.A., millions of dollars were lost participating in Wall Street "product" investments such as loan syndicates and aircraft lease trusts.

Cathay has stuck largely with its bread-and-butter Chinese clientele, choosing to play to its strength -- expanding in Flushing, N.Y., for instance, and Houston, where Chinese populations are booming. It also added an office in Shanghai, to better serve U.S. customers involved in Chinese trade.

Rabatin, for one, is comfortable with Cathay's focus on its core market, which he expects to continue growing from a low base due to in-migration. He likes the Chinese immigrants' cultural aversion to defaulting on loans, as well.

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Cathay Bancorp

YEAR (Dec. 31)                     2001   2000

Net Interest (millions)          $104.1  $93.2
Loan Loss Provision (millions)        6    6.4
Non-Interest Expense (millions)    43.3   40.2
Net Income (millions)              48.7   42.6
Earnings Per Share                $2.69  $2.35

SUMMARY

Business: Banking

Headquarters: Los Angeles

CEO: Dunson Cheng

Market Cap: $682.2 million

Dividend Yield: 1.5%

Total Assets: $2.7 Billion

P/E Ratio: 14.1

Long-Term Debt: N. M.

N.M. = Not meaningful

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [e-mail].