Basic financial services, such as checking accounts and loans, are commodities these days, making it tough for individual banks to differentiate themselves. One exception, however, is UCBH Holdings(Nasdaq: UCBH), which has found a profitable and growing niche market in serving the Chinese-American community in California.

Today, the bank holding company, parent to United Commercial Bank, reported fantastic earnings for 2002, capping a year of stellar growth that propelled its stock 50% higher. Diluted earnings per share for the full-year 2002 came in at $2.05, marking 34.1% growth and topping analysts' consensus estimate by a nickel. This marks the fifth consecutive year that UCBH has achieved earnings growth in excess of 25%.

Along with strong earnings, UCBH is making gains in its asset productivity. Normalized return on assets (ROA) and return on equity (ROE) for 2002 were 1.24% and 20.11%, respectively, compared with 1.12% and 19.58%, respectively, for the prior year. To put UCBH's 20% ROE into context, consider that the average regional bank generated a 13% ROE this past year.

One of the reasons for UCBH's strong growth and high returns is its competitive advantage in serving California's ethnic Chinese market. According to hedge fund manager Stephen Gresdo of, about 50,000 families of Chinese descent come to the U.S. each year, and most of them settle in areas of California where UCBH has a presence. Gresdo also notes that this group's demographics are very attractive:

  • Some 12% of California's population is ethnic Chinese, and 40% of that 12% were born in the U.S.
  • The number of ethnic Chinese in the U.S. has grown by 48% in last decade.
  • 44% have college degrees.
  • 35% are "well-employed" in management or professional jobs.
  • Median household income is $75,000, on average. That's 20% to 80% higher than other major ethnic groups.
  • Asians' savings rate is 75% higher than the rest of the U.S.

In the most recent quarter, UCBH made strides to expand its relationships within the retail and commercial Chinese niche markets through two acquisitions: 1) Bank of Canton, which has 12 branches in California, thereby expanding UCBH's California footprint; and 2) a branch of a New York bank, offering access to the New York market, which has the second-largest concentration of Asian-Americans in the U.S.

Looking ahead, UCBH management is optimistic about further growth, as are analysts who are currently projecting 2003 earnings per share of $2.49. With the stock currently around $44.60, that's a forward P/E of 17.9 on a company growing earnings at close to 25%. In comparison, the average regional bank trades at a P/E of 14 and is growing earnings at closer to 10%. Given UCBH's strong market niche and continued growth prospects, it could be worth the higher price tag.