Cathay General Bancorp stock: the average LTV ratio of 50% is attractive
Last time I talked about Cathay General Bancorp (NASDAQ: CATY) about six months ago I liked the bank’s low LTV ratio in both the commercial real estate portfolio and the residential mortgage portfolio (both are focused over California and New York). Of course, a lot has happened since that last article. Russia has invaded Ukraine, interest rates have been raised and the economy is shrinking. Although the stock price is down about 10% since my previous article, now is an opportune time to take a look at the bank’s performance in the first half.
EPS remains strong thanks to low loan loss provisions
Looking at the second quarter results, the very first thing you see is the massive increase in net interest income. We see an increase of over $17.5M in interest income, while total interest expense has increased by just over $1.5M. This increased net interest income by more than 10% to just over $175 million. An impressive result.
Cathay, on the other hand, saw its net non-interest expense fall from $52 million to just under $60 million. This was primarily because the bank was able to record a $6 million gain on equity securities, while it lost nearly $1 million on securities in the second quarter. This $7 million delta almost alone accounts for the “deterioration” in non-interest earnings, although we should simply conclude that there was a one-off benefit in the first quarter and that the situation is now unfolding. normalize.
Cathay General Bancorp recorded a provision for loan losses of $2.5 million in the second quarter, resulting in pre-tax profit of $113.2 million and net profit of just under $89 million, or $1.19 per share.
Book value per share: surprisingly stable
While most other banks see their equity value (and therefore their book value per share) affected by the decline in value of the portfolio of securities classified as “available for sale” due to the mandatory principle of valuation at the price of the market, Cathay seems to be immune to that. Although the net book value is slightly lower than at the end of the 2021 financial year, keep in mind that Cathay has repurchased shares and paid a dividend.
The current quarterly dividend is $0.34 per share, which means the payout ratio is below 30%, but more importantly, it also means that given first-half EPS of $2.18, the book value per share would have increased by approximately $1.50.
This does not happen. While there was likely to be some impact on available-for-sale securities, we should also keep in mind that the company repurchased over 1.3 million shares in the first half, which would have resulted in a total cost around $55-60 million and keeping that in mind, the decrease in book value of $15 million isn’t bad at all.
In fact, it increased total book value per share as the number of shares declined at a faster rate than equity value and at the end of the first half, Cathay’s book value per share was $32.67. Keep in mind that more than 15% of the book value is goodwill and if we deducted the $383 million of goodwill and intangible assets from the net worth of 2.43 billion, we end up with tangible equity of $2.05 billion, which equates to just over $27.5/share.
I’m also not too worried about the $17.8 billion loan portfolio, even though about 48% of the loans are classified as commercial real estate.
As explained in a previous article, Cathay’s average LTV ratios are low. In the CRE portfolio, the average LTV ratio is around 52% with only 28% of loans exceeding an LTV ratio of 60%. We see a similar percentage in the residential mortgage portfolio, where the average LTV of the $5.4 billion portfolio is just 55%. So even if all the houses suddenly lost value by 50%, Cathay General would still be able to walk away without too much of a haircut. This means that Cathay’s loan book appears to be more secure than most of its peers.
Cathay General’s first half was much stronger than I had anticipated. To my surprise, the bank was able to avoid the (sometimes significant) hits to stock value due to rising interest rates, causing the value of available-for-sale securities to decline. Other banks have suffered from this development, but Cathay’s performance seems quite robust.
While a stock price of approximately 1.5 times tangible book value may seem high, keep in mind that Cathay is trading at an earnings multiple of less than 10, while the current dividend yield of 3.2% only requires about 30% of earnings to be spent on dividends. . This means that – excluding the impact of changes in the value of the securities, the book value will increase at a rate of $2.5 to $3 per share per year, which will quickly reduce the premium to the tangible book value per share.
I don’t currently have a position in Cathay General Bancorp, but I might try selling some put options in the near future, although I might just have to buy the stock.