Cathay General Bancorp: Balancing Dividend Resilience and Credit Risks in a Shifting Banking Landscape

The regional banking sector has long been a battleground for balancing shareholder returns with prudent risk management. Cathay General Bancorp (CATY), a stalwart in the California market, has navigated this tension with a blend of disciplined capital allocation and a conservative dividend policy. Yet, as credit risks rise and competition intensifies, the question remains: Can Cathay sustain its dual promise of income and growth for long-term investors?

A Dividend Policy Rooted in Prudence

Cathay's dividend history is a testament to its commitment to shareholder returns. Over the past five years, the bank has maintained a consistent quarterly payout of $0.34 per share, translating to an annualized yield of 2.88% as of August 2025. This yield, while slightly below the Financial Services sector average of 2.89%, reflects a conservative payout ratio of 32.6%—well below the sector's 41.3% average. Such restraint is a deliberate choice, ensuring that earnings are retained to fortify capital buffers and absorb potential credit losses.

The sustainability of this policy hinges on earnings resilience. In 2024, Cathay reported a 19.2% decline in net income to $286 million, driven by a shrinking net interest margin and rising credit costs. However, the fourth quarter of 2024 saw a 18.8% sequential improvement in net income, fueled by reduced deposit costs and a modest rebound in loan growth. This volatility underscores the importance of a low payout ratio: even amid earnings dips, Cathay's dividend remains well-covered, offering a buffer against short-term shocks.

Capital Returns: Buybacks and Strategic Reinvestment

Cathay's capital allocation strategy in 2024 further reinforces its shareholder-friendly approach. A $150 million stock repurchase program, authorized in June 2025, saw $35.6 million deployed in Q2 alone. These buybacks, funded by a 11.5% year-over-year increase in Q2 2025 net income to $77.5 million, signal confidence in the bank's intrinsic value. The program's execution—4.4% of equity—aligns with Cathay's broader philosophy of returning capital while maintaining a fortress-like balance sheet.

The bank's capital ratios remain robust, with a Tier 1 risk-based capital ratio of 13.35% and a leverage ratio of 11.09% as of June 2025. These metrics, well above regulatory thresholds, provide ample room for buybacks and dividend payments without compromising financial stability. Moreover, Cathay has strategically reallocated capital to lower-risk segments, such as commercial real estate and residential mortgages, while reducing exposure to volatile construction loans. This rebalancing mitigates the impact of macroeconomic headwinds, particularly in a low-rate environment where borrower margins are under pressure.

Credit Risks: A Looming Challenge

Despite these strengths, Cathay faces mounting credit risks. Non-performing assets surged by 55% year-over-year in Q2 2025, reaching $199.5 million, driven by a 12.7% increase in non-accrual loans. The allowance for loan losses (ALL) to non-performing loans ratio fell to 96.12% from 112.06% in Q1 2025, indicating a reduced buffer against future defaults. While management attributes these trends to a few large commercial defaults and a loan relationship downgrade, the broader context is troubling: regional banks nationwide are grappling with rising delinquencies, particularly in commercial real estate and construction sectors.

Cathay's geographic focus on California and Asian-American markets, while historically a strength, also exposes it to regional vulnerabilities. The decline in construction loans by 9.5% in Q2 2025 highlights the sector's fragility. Yet, Cathay's proactive shift toward lower-risk lending and its strong capital position provide a critical cushion. The bank's CET1 ratio of 13.6% and its strategic reinvestment in affordable housing and renewable energy projects further diversify risk and align with long-term growth opportunities.

A Comparative Edge in Credit Risk Management

Cathay's credit risk practices outperform many peers. While industry averages show rising loan loss provisions and non-performing asset ratios, Cathay's non-performing assets to total assets ratio of 0.84% remains below the regional bank average. Its efficiency ratio of 45.34% and net interest margin of 3.27% also outpace competitors, reflecting disciplined cost management and pricing power. Analysts project a 26.42% upside for the stock in 2025, driven by its ability to reduce credit loss provisions and maintain asset quality amid sector-wide challenges.

Investment Implications

For long-term investors, Cathay presents a compelling case. Its dividend policy, anchored by a conservative payout ratio, offers a reliable income stream even in a low-growth environment. The buyback program, supported by strong capital ratios and earnings resilience, enhances shareholder value without overexposing the balance sheet. However, the rising credit risks necessitate vigilance. Investors should monitor the bank's loan loss provisions, non-performing asset trends, and the pace of its strategic loan reallocation.

In conclusion, Cathay General Bancorp's ability to balance dividend resilience with prudent capital returns positions it as a resilient player in a challenging sector. While credit risks are present, the bank's strong capital base, strategic reinvestment, and disciplined approach to risk management suggest that its dividend and buyback programs remain sustainable. For investors seeking a blend of income and growth, Cathay offers a compelling, though not without caution, opportunity.