Cathay General: attractive loan portfolio with low LTV ratios (NASDAQ: CATY)

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Cathay General Bancorp (CATY), the holding company of Cathay Bank, focuses on the California and New York markets. Although the vast majority of its assets are in loans, I feel the bank is focusing on strong borrowers as loan losses have remained limited while diversification and LTV ratios look good.

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FY2021 results at a glance

In 2021, the bank saw its interest and dividend income decline by around $34m to just over $666m. But fortunately lower interest rates also meant that Cathay had to pay less on deposits and its interest expense was down by around $80 million, resulting in a net increase in interest of around $45 millions of dollars. This is a great result, but it also means that the potential to reduce interest charges even further is very limited, so it may be good to see the Federal Reserve signaling rate hikes.

CATY Income statement

Cathay Bancorp Investor Relations

The bank also reported net non-interest expense of approximately $234 million, which translated to pre-tax and pre-loan loss provision income of approximately $366 million (compared to just $312 million). million for fiscal year 2020). The bank was also able to reverse approximately $16 million in provisions, resulting in reported pre-tax income of $382 million and net income of $298.3 million on EPS of 3 $.81. It’s worth noting that the bank’s fourth-quarter EPS was around $0.98 despite having to record a loan loss provision of $3.5 million. The strong fourth quarter results were fueled by strong net interest performance, as the bank reported net interest income of just over $155 million.

Cathay currently pays a quarterly dividend of $0.34 per share, which means the dividend is very well covered. But with a stock price in the mid-$40s, the dividend yield of just under 3% is definitely not the highest on the street.

Looking at the loan portfolio, it seems to be heavily focused on residential exposure and low LTVs

It is also important to understand exactly what the bank has invested in. According to balance sheet assets (see below), the bank has approximately $2.45 billion in cash and short-term investments, with an additional $1.13 billion in securities. This means that approximately $3.6 billion is held in liquid to highly liquid assets. The total size of the loan portfolio is approximately $16.2 billion, including approximately $136 million of existing provisions.

Cathay Bancorp balance sheet

Cathay Bancorp Investor Relations

It is also important to understand what the loan book actually consists of. You might not like to see that around half of the loan portfolio is made up of commercial real estate, but it seems Cathay has a good understanding of the situation and is keeping the risks rather limited. In addition, the 24% residential mortgage should also be a good platform.

CATY loan book

Cathay Bancorp Investor Relations

One of the main reasons I watch Cathay is its transparency. While most other banks don’t bother to publish LTV ratios for their respective loan portfolios, Cathay is leading by example. The bank provided a very detailed breakdown of the Loan-to-Value ratios of its commercial real estate portfolio. As you can see below, the average LTV ratio is around 51%, with over 70% of its loan book having an LTV below 60%. It’s awesome. And as you can see below, the LTV ratio in the hospitality industry (hotels, motels, restaurants) is typically below 50%. This means that I expect Cathay to be able to recoup much (if not all) of its investment should a borrower default on its loans.

CATY LTV ratios

Cathay Bancorp Investor Relations

Looking at the distribution of the residential portfolio, we see that the weighted average LTV is only 55%, with around 60% of loans having an LTV ratio below 60%. And about a third of the residential mortgage portfolio has an LTV ratio below 50%. This means that (in the unlikely event) if some of these borrowers defaulted, the market value of the home would have to be at least 50% below the appraised value of the property for Cathay to realize a loss on the loan.

CATY LTV Breakdown

Cathay Bancorp Investor Relations

Investment thesis

Although Cathay does not appear to be the cheapest bank stock available with its 11-12 P/E ratio, sub-3% dividend yield and 1.7 P/TBV based on its book value tangible price of just over $27/share.

That being said, it also appears to be one of the “safer” banks, as the average LTV ratio in its loan portfolio is rather low and even the high exposure to commercial real estate appears to be well hedged due to low LTV ratios and good diversification.

I’m not buying Cathay General Bancorp at the current share price, but it’s definitely a bank I’d like to downgrade. I like the conservative approach of the loan book, but would like to get it at a lower price.

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