De novo Digest: Riches in niches
By Matt Bierce

A number of ethnically focused de novos are popping up that cater to the unique needs of immigrants and minority businesses, and could provide the community banking industry with a vital new source of customers, deposits and quality credit.

Jay Brew, chairman and CEO of BNK Advisory Group, told SNL that members of the Hispanic, Korean and Indian communities tend to have very good credit, as all three cultures foster the principle of paying back what one borrows.

There has already been tremendous growth in the Asian-American banking market, but James Rockett, a partner at Bingham McCutchen LLP, told SNL that the much larger Hispanic, and more specifically the Mexican, communities are relatively untapped by the banking sector. He anticipates growth in Hispanic-focused banks to follow the model of the successful Chinese startups, especially as banking products that appeal to the members of those communities become "more sophisticated" and widespread.

Even Jay Sidhu, Sovereign Bancorp Inc.'s former CEO, recently told SNL that the future of de novo banks lies in niche players in "high-growth" communities like the Hispanic and Chinese-American markets.


The new round of ethnic de novos will be much like the banks that catered to the waves of Southern and Eastern European immigrants a century ago, according to Nicholas Ketcha Jr., a managing director at bank consulting firm FinPro Inc. Banks staffed with people who understand their customers' culture and speak their primary language are often much more approachable to ethnic communities than larger institutions with multiple layers between customers and decision makers.

"One of the challenges for ethnic-focused banks is that they have to find really good managements that can run the bank while they are simultaneously appealing to the cultural needs of a particular community," said Rockett.

Expressing similar concerns, Brew said that ethnically focused de novo organizers "tend not to have the basic banking business model down." They are often good at the lending side of the equation, he said, but rely on "hot money" like CDs without good plans to attract core deposits. Brew said he often encourages his clients to utilize their minority status by going after deposits available from corporations seeking to satisfy community reinvestment requirements.

Latino Lending

Garner, N.C.-based Nuestro Banco is a Hispanic-focused bank in organization supported by strong management experience. Lee Bradley, a managing director at SAMCO Capital Markets who is helping to raise the bank's capital, recently told SNL that he has seen a number of startup Hispanic banks that lack banking experience, so President and CEO David Flores' 37 years of experience in banking was a major draw.

The Hispanic community in the U.S. is, by all accounts, growing by leaps and bounds in numerous markets. The Census Bureau reported that, as of July 1, 2004, the U.S. Hispanic population reached 41.3 million, not including undocumented immigrants, and accounting for one-half of the national population growth between 2003 and 2004. In 2005, the bureau estimated that by 2050, the Hispanic population will reach 102.6 million. Despite this "tsunami" of Hispanic population growth, Bradley said there have been few attempts to meet the community's banking needs.

Huntington Park, Calif.-based Banco Del Tepeyac is a de novo bank whose organizers hope to meet those needs. Proposed President and CEO Emilio Sanchez-Santiago told SNL that his bank is eyeing the "large pockets" of people who use nonbank financial service providers in the area for money remittance and payday loans as potential customers.

Sanchez-Santiago predicted that there will be a "wave" of new Hispanic banks to open around the country over the next few years because of the current number of underserved people and businesses. In its de novo application, Banco Del Tepeyac stated that there are only four Hispanic-owned banks in Los Angeles County, which has a 47% Hispanic population, while there are 27 banks focused on its 13% Asian population. The number of Hispanic-owned businesses is rising and those companies will be a good source of business for banks with a shared culture, Sanchez-Santiago said. The Small Business Administration reported May 9 that the number of minority-owned businesses receiving its loans tripled between 2001 and 2006.



Brew is currently helping to organize a startup that has identified a market with a large and growing Hispanic population that could already accommodate up to 20 branches, he said. This same group also plans on reaching out to the local Korean population as part of a multiminority-focused strategy, a tactic that has also been implemented by other banks, such as Lawrence, Mass.-based Veritas Bank, which has targeted both the local Hispanic and Asian communities.

Asian Assets

Indian-American banks are also gaining prominence as large populations of Indian immigrants are now well-established in many communities around the country. Novi, Mich.-based Lotus Bank CEO Satish Jasti recently told SNL that his bank is focusing its efforts on the 60,000 to 80,000 or so Indian medical, engineering and IT professionals in the Detroit suburbs as well as Indian shop and business owners. He thinks there will be "more and more" Indian-owned banks focused on the large Indian-American community, noting that the main reason there have not been many until now is that the community simply lacks familiarity with the business of banking in the U.S.

That will change when the large number of second-generation Indian-Americans employed as junior-ranking investment bankers and commercial bankers reach the level of experience needed to manage and start up new banking enterprises, he said. Jasti said there is "a lot of capital in the Indian-American community" that will begin going toward these banks once investors start seeing their success.

The Lotus executive said his bank has an advantage in reaching out to Indian-American customers because his team knows their values and business ethics, is flexible, and can work around customers' schedules. However, since many Indian-Americans already have a banking relationship, Jasti said, "[They] are not going to come to us just because we're Indian." The bank will have to be competitive on pricing as well.

East-Asian-focused community banks have also been steadily multiplying in major metropolitan areas like Atlanta, Los Angeles, Atlanta and Seattle. Many of these banks are focused on communities of immigrants from China, Vietnam, Cambodia, Korea, the Philippines, Laos and Thailand. Asian-American immigrant populations are in all parts of the country and often have a high percentage of business-owning entrepreneurs, according to a Barron's report.

Lynnwood, Wash.-based UniBank, which opened for business in November 2006, targets communities of Asian-American heritage. A local paper reported in August 2006 that its plan was to target a wide swath of immigrant communities, staffing its ranks with employees who speak Korean, Vietnamese, Tagalog, Chinese and Spanish and offering a mobile bank service.

Many larger banks are also trying to seek customers within the growing ethnic communities, but they have had a harder time reaching out to these customers who want more personalized service. Detroit's Comerica Inc., for instance, has what Jasti called its "Asian initiative," with Indian-Americans working in the bank, but he said the bank is having trouble getting it right because of its size and bureaucracy. On its Web site, Comerica says it is committed to becoming the "Financial Services Provider of Choice" for the "diverse" communities it serves.

Cultural Consolidation?

Bradley told SNL that given all the attention being paid to the Hispanic market by bigger banks and the inability they seem to have in reaching it, it is entirely possible that banks like Nuestro Banco will be targeted by a South American or regional U.S. bank. Rockett also sees this as a coming trend and told SNL that he has already had conversations with foreign-based institutions looking to acquire within the U.S. Bilbao, Spain-based Banco Bilbao Vizcaya Argentaria SA, for example, has been busy buying up U.S. banks in heavily Hispanic markets like Texas.

Another alternative would be a nationally franchised ethnic bank, said Brew. If put together correctly, such an institution "might have some appeal," he said. For some of the Korean startups that have not been as successful as their Chinese-American counterparts, Rockett also suggested that the banks pursue mergers with each other to gain some "serious economies of scale."

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