Commercial Loans Weigh Down Koreatown Banks

Banking & Finance Quarterly

By MYOUNG HOON SUH
Over the past decade, Koreatown has blossomed with the opening of shops, restaurants, hotels and office buildings.
And in the process, many prominent local Korean-American banks cashed in – but, it turns out, likely at a price.
The banks’ portfolios are now loaded with commercial real estate loans at unprecedented levels at a time analysts fear the commercial real estate market is headed for a giant bust.
Several of Koreatown's largest financial institutions - including Hanmi Financial Corp., the parent of Hanmi Bank, and Wilshire Bancorp Inc., the holding company for Wilshire State Bank - have multibillion-dollar commercial real estate loan volumes that approach or even exceed 70 percent of their total portfolios. That places the institutions among the most heavily exposed banks in the entire country.
Indeed, many Korean-American banks have exposure approaching five times the national average of 15 percent, according to data from the Federal Deposit Insurance Corp.
That puts Korean-American banks, as a group, at potentially greater risk than many others in Los Angeles County if they are hit with a wave of commercial loan defaults.
“Risk grows along with the size of the loan, but it wasn’t easy to predict the real estate market would be in the situation it finds itself at the moment,” said Jeong Ju Lee, senior vice president of marketing at Shinhan Bank America, the U.S. arm of a Korean bank with several L.A. branches.
Much of the trouble stems, ironically, from the growth of Koreatown, the Mid-Wilshire-area community that traces its roots to the 1960s when an influx of Korean immigrants began settling in the area and opening businesses.
The neighborhood suffered a serious setback when the 1992 Los Angeles riots left shattered windows and shuttered storefronts across Koreatown. But while many business owners left, new immigrants poured in, giving the area the highest population of Koreans outside the Korean peninsula – roughly 350,000 – and making it a target of substantial investment.
“There were quite a number of purchases of shopping malls that had around 10 stores or so,” said Sung Soo Han, executive vice president and chief lending officer of Wilshire Bancorp, which had $1.4 billion in commercial real estate loans – about 69 percent of the total portfolio – at the end of the first quarter. “There was a lot of interest in retail space since many Koreans have had their own shops.”

Cultural tendencies
Along with the Koreatown economy, the local Korean-American bank scene has flourished in recent years. The number of local institutions has more than doubled to 15, leading some to observe the area might be overbanked, with the competition possibly leading to looser lending practices.
At the same time, there are cultural reasons why Korean banks have gravitated toward real estate loans, according to local bankers.
Koreans tend to regard real estate as a valuable commodity, a mentality brought over by South Koreans who immigrated from a country with 48 million people in a landmass one-quarter of the size of California.
“Koreans have for the longest time thought of real estate as the safest of investments,” said Susanna H. Rivera, senior vice president and chief marketing officer at Nara Bancorp Inc. “If a first-generation Korean-American made money, they typically bought a house and then invested in land or office space.”
Many Korean banks profited from this mentality, but signs of trouble emerged earlier this year when office vacancies along Wilshire Corridor, which includes Koreatown, hit 10 percent in the first quarter, according to Grubb & Ellis Co. That was the first time it was in double digits in years.
The weakening of the commercial market has in part forced several banks to take steps to improve their financial positions.
Center Financial Corp. has been working for the past year to reduce its commercial real estate portfolio by $100 million through the sale of loans. The company said it managed to sell $91 million before the markets froze over.
Hanmi, which in October received an informal order from regulators to raise capital and overhaul its board, announced last week that it will receive as much as $11 million in new capital from Leading Investment & Securities Co., a South Korean brokerage firm, which will boost capital levels in the face of rising losses. There also was speculation the brokerage might acquire Hanmi in partnership with another company.
Still, many of the Koreatown banks said their commercial real estate loans are less risky in part because many are made to small-business owners – which tend to hold up more reliably during downturns than loans that rely on tenant leases.
Hanmi, for instance, has more than 60 percent of its commercial real estate loans on owner-occupied properties.
Joseph Gladue, an analyst with B. Riley & Co., said the Korean-American banks are clearly gearing up for potential losses, but he questioned whether the downturn would be as severe as some doomsayers predict.
“Whether it will be as bad as what happened on the residential real estate side,” Gladue said, “is up for debate.”
– Staff reporters Richard Clough and Charles Proctor contributed to this article

Won Over

INVESTMENT: Koreatown banks cash in on immigrant customers with exchange program for Korean currency.

By MYOUNG HOON SUH

Shinhan Bank’s four branches in Los Angeles have become a magnet for currency investing.
That’s because the bank started offering won accounts as the Korean currency began to fall against the dollar last year amid the financial meltdown.

“We started offering Korean won accounts in October,” said Tae-han Kim, vice president at New York-based Shinhan Bank America’s L.A. office. “The phones were ringing off the hook with investor interest.”

The goal of the won accounts was to build business, and the plan seems to have worked.
Since introducing the won accounts, the bank has tallied 6,000 new accounts at its 15 branches in the United States, with some of the new business credited to the won accounts.
As Los Angeles is home to the largest Korean community outside Korea, much of the activity occurred here.

“This was an opportunity for us to significantly raise our profile among the first-generation of Korean-Americans,” said Jung-Ju Lee, senior vice president of Shinhan in Los Angeles.
And that customer boost was not restricted to just Korean-Americans.
“I’ve seen a lot of overseas Koreans from Brazil and Argentina who flew in just to invest,” Kim said.

The typical won account opened was about $150,000 when the exchange rate was at about 1,200 won per dollar, but rose to about $400,000 when the exchange rate hit 1,500 won.
The trend was driven by the weakening won, which was pushed along by the collapse of some American financial institutions.

At the beginning of 2008, a dollar bought 950 won. By the second quarter, the exchange rate was up to 1,000 won; by the third, 1,100; and by December, 1,500. (For comparison’s sake, when the currency crisis hit Asia in 1997, $1 bought about 2,000 won.)

As fears about the viability of American financial institutions have eased, the exchange rate has strengthened some to $1 buying 1,250 won.

So if someone invested $100,000 in December when the dollar was trading at 1,500 won, 150 million won would been deposited in the Korean won account. If the won were converted back to dollars in March when the exchange rate was 1,250, the customer would have $120,000 deposited in a dollar account. That would be a 20 percent profit in three months.

The won accounts brought Korea more dollars than usual. Many Koreans send routine remittances to their home country in normal times and foreign interests also send investment dollars. In 2008, the total dollars sent from the across the world to Korea was $7.9 billion, well up from $5.9 billion the year before. For the first quarter of 2009, the total was $2.1 billion, according to figures from the Bank of Korea.

The bump in won accounts also helped local Korean banks, which have been struggling with the sluggish economy and commercial loans. (See story on page 22.)

The number of Korean banks in Los Angeles has grown over the past decade from six to 15; the Korean population in Los Angeles is estimated at 340,000.
While the won accounts appear to have been successful for Shinhan, it might not be a long-term advantage, said Susanna Rivera, senior vice president and chief marketing officer for Nara Bank.
“The currency rate is unpredictable. So if the rate dropped sharply, the customer might have a grudge,” Rivera said.
Regardless, L.A.-based Korean banks have an investment in the local community, so they’re not always enthusiastic about the concept.
“It means that currency gets out of Los Angeles,” Rivera said. “And it has a bad effect on the L.A. economy.”

What is the news?

I am pondering on what is the news. I was sure that I already knew due to my experience. But now I’m confusing the concept of news whenever I read the American newspapers. I found often the articles which might not be printed in Korea.

There are lots of stories talking in a quiet tone and about common people who don’t have any creditable achievements. These kinds of stories would not tell enormous instructions but they made a great impression on me. I could not help falling in love these stories.

It seems like a ‘storytelling’ which is topic of Korean media. The influence of internet grows more and more, they have focused on storytelling. The web users don’t like the traditional type article. We call something new and something different article ‘storytelling’. But nobody knows exactly what kind of type they want.

Frankly speaking I didn’t understand Professor John schneller saying, “You could find the story everywhere for example coffee shop or barber shop”. At that time I believed that news must be something new or something strange. I adore the maxim “If dog bit a man, it is not a news but if men bit a dog, it is a news” (photo by photo.naver.com/view/2005011609022155016)

But American media could make a story even though if man bit a dog. They got down why and how bog bit a man. Perhaps John wanted to let me know this.

What is the journalist?

It was very difficult to find story when I started my L.A. life. Because I didn’t have the beat and the field I had to cover. I was really at a loss at that time. But I often swung by the coffee house or the pub and then I pay attention what people said. Sometimes I feel like wasting time but I find story out of left field.

Now I feel all the more keenly what reporters have to do. I’m working on the story about commercial real estate(CRE) loans with my mentors, Rick and Charles. Banks which have lots of CRE loans are exposed high-risk due to property slump. Unfortunately, Korean banks’ CRE-portfolios balloon to unprecedented levels. Indeed, at some local institutions the percentage of CRE loans in the total portfolio is roughly five times the national average.

An emotional conflict was created in my mind. If this article was printed, Korean banks would get heavy blow to their business. I really don’t want to hurt someone because of my writing. But I have to report that. I have to put public interests or fact finding before my likes and dislikes. It is a fatal destiny of reporter. Journalism always asks me ‘what is right’ and ‘what I have to do as a reporter’

The difference of regulation

I was taught the difference between supervisory system of U.S. and Korea’s. U.S system is separated into business fields, Banking and Insurance, Stock. Moreover Banking supervisory institutions are separated into FRB and FDIC. I wonder how to harmonize and how to cooperate.
There is only one supervisory institution(The Financial Supervisory Services, FSS) since 2000. Our system was the same before Asian financial crisis. Korean governor followed the advice of IMF that recommended us to united supervisory institutions.

I think the united supervisory system is very useful. Because nowadays it is nonsense to draw the line among finance business. A lot of finance goods are inseparably fused together. For example investment annuities and mutual funds are investment goods as well as insurance goods.

And I found amazing website(https://cdr.ffiec.gov/public/ManageFacsimiles.aspx). I could found all information of banks. Everyone could find financial statements and a statement of profit and loss easily.

But I found the common problems. It is not easy to compare directly because the accounting terms didn’t unify. For example, some companies contained donation among the item of advertising and public relations. But the others reported separate account.

This problem is hot issue in Korea. Regulators and association of certified public accountant started to unify accounting terms. They tried to make a best practice and then the companies might follow it. But it is not mandatory. I think ‘not mandatory’ is a limits.

How to adjust to 'the difference of viewpoint'

I still feel the point of view is different. I have felt between home media and the LA business Journal.

I focused on investor’s story. Everyone wants to know how to make money or how to succeed in investing in Korea. Especaily human success story is good stuff. So I started my lead like this;

Los Angeles resident Mr. Oh recently realized a whopping 30% return in little less than seven months. It’s a rate of return that’s hard to believe during these tough economic times. But what’s harder to believe is that there were about 15,000 others just like Mr. Oh.

But My editor, Charlie, asked me to focus on bank or company. I rewrote my lead like this

Shinhan Bank's four branches in Los Angeles have become a magnet for currency investing. That's because the bank started offering won accounts as the Korean currency began to fall against dollar last year amid the financial meltdown.

I think the investment story is also good subject matter. Perhaps my story is too narrow and limited. It is not investment story, but Korean's investment story.

I’m glad that I made a long story. It is the process that I adjust to American media style. Also I’m sure rewriting is helpful to understand the style.

I realized that I have to lose favor with the Korean way of thinking. I have tried this, but it is not easy.

In the last two weeks, there were a lot of annual shareholder meetings of the Korean American banks. Many board members were replaced because of poor performance.

The title of board members has the special meanings for Korean. In many cases, the wealth goes together the honor. But immigration society is something different. The honor is separated from money.

The most of board members already have a lot of money and succeed in their business. So they have a tendency to chase the honor. Losing the title is equal to lose the honor.

I am trying to write articles about non-financial companies. I have to change my beat when I return home because most of my experience is in the financial sector.

There is a strange trend in Korean media. Korean reporters must rotate their beat maybe once every other year. This trend starts to change, but it’s very slow and not enough. Editors prefer a generalist than a specialist until now.

I guess my next beat is department of industry or property. It's the department I didn't have experienced.

I contacted Kotra, Korea Trade-Investment Promotion Agency, which handled an exhibition and investment consultation. There is a lot of information about companies, trying to expand business to U.S. or Korea.

To be honest, I have a bad impression about company groups like Samsung and Hyundai. They played dirty and killed small and medium enterprises in the process of growth.

Sometimes these big groups attack from low-price to merge promising small company or to acquire their technology instead of paying reasonable price. Moreover if the small companies developed niche market and succeed in their business, the groups violated. They should have leaned win-win.

A lot of people knew that the company groups accumulated capital a way to smuggle home appliances or the necessities of life into Korea.

But I acknowledged they changed in the right direction. When I saw foreigners used Samsung mobile phone and Hyundai cars ran fast on the freeway in U.S., as a Korean I’m very proud of that.

Sometimes, especially when I was abroad, I thought that exporting companies are true patriot. This is why I’ll try to cover industry field.

This is my original story.
by Myoung Hoon Suh

Los Angeles resident Mr. Oh recently realized a whopping 30% return in little less than seven months. It’s a rate of return that’s hard to believe during these tough economic times. But what’s harder to believe is that there were about 15,000 others just like Mr. Oh.

What Mr. Oh and thousands of others just like him have in common is that they all converted their holdings of US dollars into the Korean won in October not long after the fall and demise Lehman Bros. Most of them were overseas Koreans, but includes a wealthy American who invested more than U$2 million.

There may be those who deride them for being no more than simple currency speculators, but a closer look reveals two reasons why they cannot be brushed off so easily.

The investment story starts back in September of last year. Before then, during the first quarter of 2008, the KR\/U$ exchange rate was less than \950 per dollar. But the rate inched up bit by bit and breached the \1,000 mark in Q2 and had reached \1,100 by September.

Mr. Kim Tae-han, vice president of Shinhan Bank America, said, “It is a parity that 100,000 dollars is 100 million won almost a given the last 5-6 years,” he said. “But investment inquiries started to flood in once it went to \1,100.”

But the action got off to a real start come October after the exchange rate shot up to \1,300 with the failure of Lehman Bros. The average investment was around U$100,000-U$200,000 when the exchange rate was in the \1,200 range, but rose to an average of U$300,000-U$500,000 over \1,300.

Mr. Kim said “We started offering Korean won accounts in October,” and that “the phones were ringing off the hook with investor interest.”

For example, it was an account that deposited the equivalent of U$100,000 in Korean won at the time of opening.

New Korean won accounts opened in October came to U$70.5 million, then U$80.69 million the next month before tapering to U$59 million in December.

According to the Bank of Korea, a total of U$7.9 billion was remitted from overseas last year. Such flows continued this year when U$2.1 billion was remitted to the end of last March.

An investor who came in December when the exchange rate was \1,500 per U$1 he would have realized a tidy 20% as of the current rate of \1,250. For example, if U$100,000 was invested at \1,500, a total of \150 million would have been deposited in the Korean won bank account. But when the amount is converted back to US dollars at current rates, a total of U$120,000 would be deposited in a US dollar bank account.

The profit margin would have been a lot higher had the investment been in either Korea’s stock market or Korean real estate than simply in a deposit account.

The bellwether Korea Composite Stock Price Index, or KOSPI for short, has surged more than 25% to over 1,400 from 1,124.47 at the end of last year. The combined haul would top 40%, however, if the exchange rate differential were to be factored in.

Investors in real estate are also realizing substantial gains. Mr. Ahn Myung-Soo, the real estate team leader at Woori Bank PB, said, “Overseas Koreans’ currency conversion was heaviest at \1,400 per U$1,” and “though there weren’t many who converted at the peak, the 10-15% appreciation of their real estate investments have translated into an average return of about 30%.”

More interesting is the fact that such investing hasn’t been confined solely within the American Korean communities. Mr. Ahn said, “I’ve seen a lot of overseas Koreans from Brazil and Argentina who flew in just to invest,” and that “Most bought properties in Korea’s most vibrant and most expensive real estate district, which is Gangnam, it’s like Beverly Hills, in Seoul.”

For Korean banks, overseas Koreans’ remittances were like rain to ward off a drought. At the time, all the banks were frantic trying to secure dollars in a liquidity crisis. And under such circumstances overseas Koreans’ remittances were welcomed to no end.

More than having sat on one’s laurels waiting for the global financial crisis to happen, what was it other than holding enough in cash to have convinced all the investors to invest with such confidence? First and foremost would be the experiences wrought from the foreign currency crisis of 10 years past.

In 1997, Korea sought relief financing from the IMF as a result of the foreign currency crisis. The won-dollar exchange rates had gone from about \900 to about \2,000 per US dollar within a span of only a few months. But Korea was about to weather the foreign currency crisis in about 3 years.

Mr. Oh said, “My confidence in Korea cemented after going through the foreign currency crisis.” He added, “Like the last time, the Korean economy will likely be affected for a while by this financial crisis, but I decided to invest because the country will eventually do more than simply recover.”

To be sure, Mr. Oh had more practical reasons for deciding to invest. He said, “Korean banks’ interest rates were in the 6% range whereas American banks’ deposit rate were no more than in the 4% range,” and “I was concerned about the value of the dollar falling with so much already having been supplied to fight the financial crisis.”

Korean-American investments might just look a lot like investor Warren Buffet’s value investing. After all, they believed in Korean economy’s value and decided to invest with far-sighted investment horizons.

Such investment trends have brought about two big changes. First is that Shinhan Bank has become a household name among overseas Koreans. Mr. Lee Jung-Joo, vice president of Shinhan Bank America, said, “It’s been less than ten years since Shinhan Bank become one of the Big Three in Korea,” and “This was an opportunity for us to have significantly raised our profile among the first-generation of Korean-Americans.”

In fact, Shinhan Bank’s Korean won deposit accounts grew by more than 6,000 accounts after October last year.

This has had an impact even in policymaking. Having seen the brunt of a foreign-currency shortage and the long Korean-American queue for remittances, the Korean government approved a money market fund exclusively tailored to overseas Koreans and planning to lower foreign capital gains tax from the current 20% to 5%.