For Korean Banks, Truly a Golden State

They have thrived by serving California's loan-hungry small businesses. Now, that same formula is spreading to other states

At the height of the 1992 Los Angeles riots, Korean-American banker Benjamin B. Hong paced up and down in his house just a few blocks from the trouble, wondering what to do as his customers' businesses were looted and burned. From his bookshelf, Hong pulled out a biography of Bank of America founder A.P. Giannini and read that, after the San Francisco earthquake in 1906, Giannini set up a temporary office on the waterfront and made loans to small businesses based on only a handshake. Hong told his branch managers to do much the same: offer existing customers loans of up to $100,000 without collateral. Fifty customers took him up on the offer. Not one defaulted.

Such community support has turned Korean-American banks into some of the fastest-growing and most profitable financial institutions in the nation. There are now nine in Southern California -- five trading on NASDAQ. In the past four years, their assets have doubled, to more than $5 billion. That's still tiny by big-bank standards, but the success of these banks' highly local management, marketing, and ownership makes them fierce competitors. "They are a real American success story," says Alberto G. Alvarado, director of the Los Angeles office of the Small Business Administration.


  While the banks' performance has been impressive, investors haven't taken full advantage. The five listed Korean banks earned an annualized 18% on equity through the third quarter of last year, vs. 13% by similarly sized banks nationwide, says Sheshunoff Information Services. Still, they trade at just 10.2 times estimated 2003 earnings, vs. 11.6 for their peers, according to San Francisco brokerage firm Hoefer & Arnett. "With their growth rates and the strength of their portfolios, they should trade at a premium to other bank stocks," says Scott W. Hood, a money manager at First Wilshire Securities Management in Pasadena, Calif., who owns stock in four of the banks: Hanmi Financial, Center Financial, Nara Bancorp, and Wilshire State. "They are in a niche that is not well understood."

The banks are getting a pop from a huge influx of South Koreans. The immigrant population climbed 35% in the 1990s, triple the rate for the population as a whole, and about 250,000 of the country's 1 million Korean Americans live in Southern California. They're the most entrepreneurial of U.S. ethnic groups, with one business for every eight people, according to a November, 2001, SBA report. Although they account for just 0.4% of the U.S. population, they control 11% of the nation's grocery stores and as much as a third of its dry cleaners -- small businesses that are often hungry for loans. And more than half of their businesses have accounts at Korean-American banks.

The Korean banks' international ties are another plus. In fact, the oldest of them, Pacific Union Bank, was founded by a South Korean bank back in 1974. These connections spur trade-related business such as money transfers, letters of credit, and loans--particularly for Los Angeles' garment district, which provides the banks with up to 20% of their business. Another source of customers: wealthy South Korean citizens investing in office buildings, apartment complexes, and strip malls in places such as Los Angeles' bustling Koreatown. "Like Hawaii for the Japanese, Southern California serves as a satellite economy for South Korea," says Hong, now Nara's president and chief executive.


  Challenges loom for the Korean-American banks. Bank of America, for one, is turning up the heat. Last year it launched its first Korean-language advertising campaign, running newspaper, radio, and TV ads in Southern California. More competition also is coming from new Korean-American banks; two have opened in Southern California since 2001. The result: The small premium that they once could charge on loans, compared with other banks, is now gone. At the same time, their heavy exposure to Southern California real estate -- 60% of loans at some of the banks -- could be a liability if that market tanks.

All this has the banks looking to diversify. So they're reaching out to far-flung communities of Korean Americans and other ethnic groups by buying or opening branches in New York, Chicago, and Northern California and by hiring tellers and loan officers who speak Spanish, Vietnamese, and even Farsi. After all, immigrants are a market these banks know well.

By Christopher Palmeri in Los Angeles

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