February 14, 2013 / 11:05 PM / 5 years ago

TEXT-Fitch raises of Cathay General Bancorp IDR to 'BB+'

Feb 14 - Fitch Ratings has upgraded the long-term Issuer Default Ratings
(IDR) of Cathay General Bancorp (CATY) and its lead subsidiary, Cathay
Bank, to 'BB+' from 'BB'. The Rating Outlook has been revised to Stable from
Positive. A complete list of ratings follows at the end of this release.

Fitch reviewed CATY as part of a peer review that included 16 mid-tier regional
banks. The banks in the peer review include: Associated Banc-Corp., Bank of
Hawaii Corporation, BOK Financial Corporation, Cathay General Bancorp,
Cullen/Frost Bankers, Inc., East West Bancorp, Inc., First Horizon National
Corporation, First National of Nebraska, Inc., First Niagara Financial Group,
Inc., Fulton Financial Corporation, Hancock Holding Company, People's United
Financial, Inc., Synovus Financial Corp., TCF Financial Corporation, UMB
Financial Corp., Webster Financial Corporation. Refer to the release titled
'Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following
Industry Peer Review' for a discussion of rating actions taken on the entire
mid-tier regional bank group.

The mid-tier regional group is comprised of banks with total assets ranging from
$10 billion to $36 billion. IDRs for this group is relatively dispersed with a
low of 'BB-' and a high of 'A+'. Mid-tier regional banks typically lag their
large regional bank counterparts by asset size, geographic footprint and
product/revenue diversification. As such mid-tier regional banks are more
susceptible to idiosyncratic risks such as geographic or single name

Fitch's mid-tier regional bank group has fairly homogenous business strategies.
The institutions are mostly reliant on spread income from loans and investments.
With limited opportunity to improve fee-based income in the near term, Fitch
expects that mid-Tier banks will continue to face greater earnings headwinds in
2013 than larger institutions with greater revenue diversification.

Share repurchases is common theme amongst the mid-tier banks. As mid-tier banks
face earnings headwinds, institutions have begun repurchasing common shares to
improve shareholder returns. Fitch anticipates continued repurchase activity in
2013 as the return on equity lags historical norms for the group.

In addition to share repurchases, Fitch has observed that some mid-tier banks
have looked to their investment portfolio to improve returns. Most notably, CLOs
and CMBS have become more popular amongst mid-tier banks. Although such
securities are beneficial to yields and returns, Fitch notes that such purchases
can be a negative ratings driver if the risks are not properly measured,
monitored and controlled.

Asset quality continues to improve throughout the banking sector. Both
nonperforming assets (NPAs) and net charge-offs (NCOs) are down significantly
year over year. Fitch anticipates further asset quality improvement as
nonperforming loan (NPL) inflow slows. Reserve levels have also declined as
asset quality improves, which has been beneficial to earnings in 2012. Fitch
expects further reserve releases in 2013 but at a slower pace.

Today's action reflects CATY's good earnings, as measured by return on assets
(ROAs), as well as a continuation in improving asset quality and capital trends.
However, ratings are constrained by the company's weak funding profile, which
predominantly represents time-deposits greater than $100K.

CATY, which has a strong presence in the niche Asian American demographic, has
experienced solid ROAs over the last several quarters. Fitch notes that CATY's
earnings performance included the impact of reserve releases, but nonetheless,
Fitch expects operating performance to remain solid over the medium term.

Asset quality in CATY's loan book has largely improved, with the company
reporting lower levels of NPAs in absolute terms, and experiencing significantly
less charge-off activity in 2012. NPAs, including accruing TDRs, were 4.46% as
of the fourth quarter of 2012 (4Q'12) compared to 5.81% a year earlier. Although
these levels remain elevated compared to the mid-tier peer group, NPAs are
considered commensurate with the rating. Fitch also notes that charge-offs have
significantly reduced with 2012 NCOs at 25 basis points (bps) compared to 95bps
for 2011.

The company reports strong capital levels with a tangible common equity (TCE)
ratio of 10% at year-end 2012 (YE12). Fitch recognizes that if CATY were to
repay TARP, it would result in reduced levels of regulatory capital. The current
rating incorporates the expectation that core capital, as measured by its Fitch
Core Capital (FCC) of 12.5%, will continue to be managed at current levels.

Despite having a loyal deposit base, Fitch considers CATY's funding profile to
be weaker than the mid-tier peer average. Time deposits greater than $100K
account for 50% of the deposit base, and high cost structured repo funding
accounts for 15% of total funding. The noted funding profile has resulted in a
more expensive funding base relative to mid-tier banks, as CATY's cost of funds
were 1.20%, compared to 50bps for the mid-tier peer group. Further, Fitch also
considers liquidity to be weaker with a loan to deposit ratio of 100%.

Cathay Bank's regulatory Memorandum of Understanding (MOU) was lifted in 4Q'12,
and Fitch anticipates that the holding company MOU will be lifted, with the
repayment of the TARP preferred stock expected sometime in the first half of
2013 (1H'13). The aforementioned are expected to take place, and have already
been incorporated in today's rating action.

With today's action, upward movement of the company's ratings is now considered
limited absent significant improvement made to the company's funding profile.
CATY's concentration to commercial real estate also represents a constraining
factor on the company's rating. Similar to others in the industry, CATY has been
originating residential mortgage loans, some of which have been held on balance
sheet. Fitch remains cautious about the growth in this portfolio, which is
predominantly 30 year mortgages and its ramifications on interest rate risk.

Conversely, the ratings could experience pressure if capital management is
aggressive once the MOU is settled and TARP repaid, or if earnings and asset
quality experience a reversal in trends.

RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Floor Ratings:
All of the mid-tier regional banks in the peer group have Support Ratings of '5'
and Support Floor Ratings of 'NF'. In Fitch's view, the mid-tier banks are not
considered systemically important and therefore, Fitch believes the probability
of support is unlikely. IDRs and VRs do not incorporate any government support
for any of the banks in the mid-tier regional bank peer group.

RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Other Hybrid
Subordinated debt and hybrid capital instruments issued by the banks are notched
down from the issuers' VRs in accordance with Fitch's assessment of each
instrument's respective non-performance and relative loss severity risk
profiles, which vary considerably. The ratings of subordinated debt and hybrid
securities are sensitive to any change in the banks' VRs or to changes in the
banks' propensity to make coupon payments that are permitted but not compulsory
under the instruments' documentation.

All of the entities reviewed in the mid-tier regional bank group have a bank
holding company structure with the bank as the main subsidiary. All subsidiaries
are considered core to parent holding company supporting equalized ratings
between bank subsidiaries and bank holding companies. IDRs and VRs are equalized
with those of its operating companies and banks reflecting its role as the bank
holding company, which is mandated in the U.S. to act as a source of strength
for its bank subsidiaries.

RATING DRIVERS AND SENSITIVITIES - Subsidiary and Affiliated Company Rating:
All of the entities reviewed in the mid-tier regional bank group factor in a
high probability of support from parent institutions to its subsidiaries. This
reflects the fact that performing parent banks have very rarely allowed
subsidiaries to default. It also considers the high level of integration, brand,
management, financial and reputational incentives to avoid subsidiary defaults.

Fitch has taken the following rating actions:

Cathay General Bancorp
--Long-term IDR upgraded to 'BB+' from 'BB';
--Short-term IDR affirmed at 'B';
--Viability Rating upgraded to 'bb+' from 'bb';
--Preferred stock upgraded to 'B-' from 'CCC';
--Support Floor affirmed at 'NF'
--Support affirmed at '5'.

Cathay Bank
--Long-term IDR upgraded to 'BB+' from 'BB';
--Long-term deposit upgraded to 'BBB-' from 'BB+'
--Short-term IDR affirmed at 'B'
--Short-term deposit upgraded to 'F3' from 'B';
--Viability Rating upgraded to 'bb+' from 'bb';
--Support Floor affirmed at 'NF';
--Support affirmed at '5'.

The Ratings Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the source(s) of information identified in Fitch's Master
Criteria, these actions were additionally informed by information provided by
the companies.
Applicable Criteria and Related Research:
--'Risk Radar' (Jan. 16, 2013);
--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible
Shrinking Branch Network)' (Sept. 17, 2012);
--'U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves;
Uncertainty Remains)' (Aug. 20, 2012)
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal
(Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)'
(Aug. 7, 2012);
--'Basel III: Return and Deleveraging Pressures' (May 17, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05,

Applicable Criteria and Related Research:
Risk Radar Update
U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking
Branch Network)
U.S. Banks: Mortgage Representations and Warranties (Banks Increase Reserves;
Uncertainty Remains)
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical
Capital Policy to Create Greater Capital Volatility for Banks)
Basel III: Return and Deleveraging Pressures
Assessing and Rating Bank Subordinated and Hybrid Securities

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