Bank - Mergers and Acquisitions
| Clouded future for UCBH |  |
November 03, 2009 4:11 PM ET
By Nick Gorski
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UCBH Holdings Inc. would no doubt make an attractive target with the added safety net of an FDIC-assisted deal, but the company also has options that could allow it to escape the fate of receivership, analysts said. In early September, Thomas Wu, the company's president and CEO, and Ebrahim Shabudin, the COO and former chief credit officer, resigned after an internal investigation revealed deception related to impairment losses on nonperforming loans and other real estate assets. Additionally, the company's banking subsidiary, United Commercial Bank, entered into a cease and desist order with the FDIC, requiring it to raise additional capital, among other provisions, while the holding company entered into an agreement with the Federal Reserve. In the wake of these difficulties, China Minsheng Banking Corp. was reported to be interested in making an additional investment in the bank. Minsheng already owned a 9.6% stake in the UCBH, and media reports indicated that China Minsheng would boost its investment to at least 50%. When an Oct. 14 report claimed that regulators would not allow a deal to go through, UCBH shares fell sharply. The company is facing a severe capital shortfall. BMO Capital Markets analyst Lana Chan estimates that the company needs to raise up to $600 million to meet the demands of the FDIC's order. Raising that much money through a public offering would be "highly unlikely," given the company's current stock price, she said. Shares closed at 90 cents apiece Nov. 2. The company could seek out a better capitalized partner, B. Riley & Co. analyst Joe Gladue said, but getting a deal done in this environment could be tough. "Most of the potential acquirers these days, they're waiting around to do FDIC-assisted deals," he told SNL. "It's difficult to find people who are just going to go in and invest in a troubled bank without getting … a loss-sharing agreement from the FDIC." He pointed out that an additional investment from China Minsheng was one of the bank's best options, but taking a majority stake in UCBH was too challenging from a regulatory perspective. "It's possible they could try and do a few of those in combination," Gladue said. China Minsheng could also take a smaller additional stake in the company, he added. "An investment like that might improve investor confidence, and make a common stock offering a little more doable." While UCBH has a strong presence in California, it also has branches in New York, Atlanta, and Houston, as well as in New England and the Pacific Northwest. Because the bank caters to American companies doing business in China, it also operates a Chinese banking subsidiary. RBC Capital Markets analyst Joseph Morford said another possibility for UCBH to raise capital is to sell its Chinese banking subsidiary. He said that according to his understanding, the company's license to operate a bank in China could be transferable to another foreign-owned bank. "There is value in that license, and the franchise that they have there," he told SNL. In the event of the bank being placed in receivership, the analysts said East West Bancorp Inc. and Cathay General Bancorp would be interested in acquiring the company. "Cathay already has the similar geographic footprint," Chan said. "East West has obviously the same ethnic niche." Neither company has made it through the credit cycle unscathed, Gladue said, noting that they face some credit quality issues of their own. Additionally, both banks are smaller than UCBH, which had $13.42 billion in assets of March 31. East West has $12.49 billion in assets as of Sept. 30, while Cathay has $11.75 billion. But Gladue noted that both companies have much larger market capitalizations relative to UCBH. Whether the companies would jump at the opportunity to acquire UCBH is up in the air. East West Chairman, President and CEO Dominic Ng said the company is focused on acquiring California banks. "There will be a lot more opportunities in the next 12 months in California within the Asian community," he said, according to a transcript of an Oct. 22 conference call. He appeared to be less interested in doing large out-of-state deals in the near future, though he said the company could consider them down the road. Cathay bank has recently raised capital, completing a common offering in October that resulted in net proceeds of about $76.0 million. An FDIC-assisted transaction could be very attractive for those two banks, however. Chan said a deal with a loss-sharing agreement would be strongly accretive to earnings immediately, and it would be a transformation deal for either potential suitor. "Both companies would need to raise a couple hundred million in new capital to support the transaction," she said. While such a deal might be challenging from an infrastructure standpoint, the loss-sharing agreement would help to mitigate the credit risk. The company's niche may make it less attractive to other potential acquirers. "It's an attractive niche," Gladue said. "But it does require a different mindset and operating philosophy; coming into an ethnic-focused bank is not something every bank is ready to take on." Morford, on the other hand, said some of the large U.S. banks could be interested in acquiring UCBH in an assisted transaction, specifically because it would give them access to that niche. However, he said East West and Cathay are the most likely buyers in an assisted transaction. One other possibility, according to Chan, is that a large Chinese bank that already has a U.S. presence could acquire UCBH. U.S. regulators have been slow to open the market to Chinese banks, but with the depletion of the FDIC deposit insurance fund, regulatory approval for such a deal could be possible. "This would be the time when I could see it happening," she said. | 
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