City National, Cathay will test bank investors’ tolerance

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

It took a while, but real-estate-related losses now are biting more Southland commercial banks, as trouble spreads up the food chain from home mortgages.

Two growing problems for the banks: loans to home builders, and commercial real estate loans.

Beverly Hills-based City National Corp. and L.A.-based Cathay General Bancorp reported first-quarter results after markets closed on Thursday, and await investors’ verdict today:

• City National said earnings sank 22% from a year earlier in part because the bank set aside $17 million in the quarter for potential loan losses. By contrast, City’s entire loss provision for 2007 was $20 million.

In all, City’s troubled assets (what the banks call ‘non-performing’) totaled $117 million as of March 31, up from just $23.4 million a year earlier.

The bank, with $15.9 billion in assets, said that more than 80% of its first-quarter charge-offs and non-performing loans were related to residential construction projects. ‘Excluding loans to homebuilders, City National’s construction and commercial real estate portfolio continues to perform satisfactorily,’ the bank said. Ditto, it said, for its home mortgage loans.

Even so, the company cut its earnings forecast for the year, warning that 2008 profit would be down between 17% and 22% from 2007. First-quarter results of 91 cents a share were 5 cents short of Wall Street’s consensus estimate.

• Cathay General, which got its start in the 1960s as a bank for L.A.’s Chinese-American community but now operates outside California as well, said its quarterly profit dipped nearly 9% from a year earlier after the bank set aside $7.5 million for possible loan losses. That reserve was up from $1 million set aside in the first quarter of 2007.

Cathay, with $10.4 billion in assets, said its non-performing assets were $70 million at March 31, up from $37.2 million a year earlier. The bank said its latest count of troubled loans included eight construction loans totaling $21 million and 20 commercial estate loans totaling $21.3 million.

Still, Cathay’s reduced first-quarter earnings of 55 cents a share actually were better than the 52-cent consensus estimate of analysts.

Investors already have punished these stocks this year, anticipating bad news. City National is down 20% year to date; Cathay is off 40%. Is that enough damage? The hit that shares of Pasadena-based East West Bancorp took on Wednesday after its dismal first-quarter report suggested investors still could be unpleasantly surprised.