Saturday, May 26, 2007

Squeezed by the Competition

In the business section of Friday’s LA Times, E. Scott Reckard tells of how the Korean banks in Los Angeles are getting hammered by both the competition and perhaps their own poor credit judgment.

As a result, the four largest Korean banks in town – Hanmi Financial, Nara Bancorp, Wilshire Bancorp and Center Financial – have seen their stock prices decline up to 30% this year compared to a decline of less than 3% for all banks according to the MSCI US Investable Market Banks Index through April 30th.

So what’s going on? It could be that the Korean banks are just getting squeezed by the competition when other large and community banks felt that they should enter a market that is underserved and perhaps overpriced. Perhaps this market has reached the point where there’s too many banks and too much money. If the Korean banks were making an above market return for the risk incurred, free markets and stupid bankers will not permit that to continue for long.

It’s also possible that the Korean banks simply made poor credit decisions and that the bad loans are now coming home to roost. Whether in response to competition or sometimes just feeling smarter than everyone else, a few bank analysts have suggested that the Korean banks may have loosened credit standards in order to continue growing assets at the same explosive rates of the last few years. Good for borrowers – maybe not so good for the lenders and their shareholders.

Is this the tip of the iceberg? Or will we start to see banks and other lenders across the spectrum report an increase in bad loans and a subsequent tightening of credit standards. Stay tuned.

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