Even though Cathay General Bancorp (currently trading at $48.37 per share) has gained 10.6% over the last six months, it has lagged the S&P 500’s 17.5% return during that period. This might have investors contemplating their next move.

Is now the time to buy Cathay General Bancorp, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Cathay General Bancorp Not Exciting?

We're cautious about Cathay General Bancorp. Here are three reasons we avoid CATY and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

From lending activities to service fees, most banks build their revenue model around two income sources. Interest rate spreads between loans and deposits create the first stream, with the second coming from charges on everything from basic bank accounts to complex investment banking transactions.

Unfortunately, Cathay General Bancorp’s 4.8% annualized revenue growth over the last five years was mediocre. This was below our standard for the banking sector.

2. Net Interest Income Points to Soft Demand

Net interest income commands greater market attention due to its reliability and consistency, whereas one-time fees are often seen as lower-quality revenue that lacks the same dependable characteristics.

Cathay General Bancorp’s net interest income has grown at a 5.4% annualized rate over the last five years, worse than the broader banking industry and in line with its total revenue.

3. Net Interest Margin Dropping

Net interest margin (NIM) represents the unit economics of a bank by measuring the profitability of its interest-bearing assets relative to its interest-bearing liabilities. It's a fundamental metric that investors use to assess lending premiums and returns.

Over the past two years, Cathay General Bancorp’s net interest margin averaged 3.2%. Its margin also contracted by 48.3 basis points (100 basis points = 1 percentage point) over that period.

This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean that Cathay General Bancorp either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.

Final Judgment

Cathay General Bancorp isn’t a terrible business, but it doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 1.1× forward P/B (or $48.37 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the most dominant software business in the world.

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