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EAST WEST BANCORP, INC. (EWBC) Q2 2024 EARNINGS CALL TRANSCRIPT
Jul. 23, 2024 7:59 PM ETEast West Bancorp, Inc. (EWBC) Stock
SA Transcripts
147.77K Followers
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> Q2: 2024-07-23 EARNINGS SUMMARY
>
> Play CallSlidesPress Release
> EPS of $2.07 beats by $0.10 | Revenue of $637.90M (-1.16% Y/Y) beats by $6.26M
East West Bancorp, Inc. (NASDAQ:EWBC) Q2 2024 Earnings Conference Call July 23,
2024 5:00 PM ET
Company Participants
Adrienne Atkinson - Director, Investor Relations
Dominic Ng - Chairman and CEO
Christopher Del Moral-Niles - Chief Financial Officer
Irene Oh - Chief Risk Officer
Conference Call Participants
Dave Rochester - Compass Point
Jared Shaw - Barclays Capital
Casey Haire - Jefferies
Ebrahim Poonawala - Bank of America
Brandon King - Truist Securities
Timur Braziler - Wells Fargo
Matthew Clark - Piper Sandler
Chris McGratty - KBW
Gary Tenner - D.A. Davidson
Samuel Varga - UBS
Andrew Terrell - Stephens
Manan Gosalia - Morgan Stanley
Operator
Good day. And welcome to the East West Bancorp’s Second Quarter 2024 Earnings
Call. All participants will be in a listen-only mode. [Operator Instructions]
After today’s presentation, there will be an opportunity to ask questions.
[Operator Instructions]
Please note this event is being recorded. I would now like to turn the
conference over to Adrienne Atkinson, Director of Investor Relations. Please go
ahead.
Adrienne Atkinson
Thank you, Operator. Good afternoon. And thank you everyone for joining us to
review East West Bancorp’s second quarter 2024 financial results. With me are
Dominic Ng, Chairman and Chief Executive Officer; Christopher Del Moral-Niles,
Chief Financial Officer; and Irene Oh, Chief Risk Officer.
This call is being recorded and will be available for replay on our Investor
Relations website. The slide deck referenced during this call is available on
our Investor Relations site.
Management may make projections or other forward-looking statements which may
differ materially from the actual results due to a number of risks and
uncertainties. Management may discuss non-GAAP financial measures. For a more
detailed description of the risk factors and a reconciliation of GAAP to
non-GAAP financial measures, please refer to our filings with the Securities and
Exchange Commission, including the Form 8K filed today.
I will now turn the call over to Dominic.
Dominic Ng
Thank you, Adrienne. Good afternoon. And thank you for joining us for our second
quarter earnings call. I’m pleased to report that the strength of East West’s
diversified business model has continued to deliver for our shareholders in the
second quarter.
Second quarter 2024 net income was $288 million or $2.06 per diluted share. We
grew end-of-period loans and deposits in a balanced way, growing each by 2%.
Loans grew in line with our expectation, driven by C&I and residential mortgage.
Deposits grew across commercial and consumer groups, marking the fourth
consecutive quarter of customer deposit growth exceeding $1 billion.
Our balance sheet growth was complemented by record quarterly fee income of $77
million, up 8% quarter-over-quarter, as we have focused on growing our fee
business. This growth was driven by notable continued strength in foreign
exchange income and wealth management fees.
Second quarter annualized net charge-offs remained stable at $23 million. Our
non-performing asset ratio was 27 basis points at quarter end, amount the lowest
when compared to our peers, and our criticized loans decreased 10%. We are
confident that our disciplined underwriting and monitoring standards will serve
us well through the cycle and we remain proactive in managing our credit risk.
Overall, our asset quality remained strong.
We delivered top-tier value for our shareholders in the second quarter,
generating a 1.6% return on average assets and a 17.5% return on tangible common
equity in the second quarter. Tangible book value per share also grew by 3%
quarter-over-quarter and 15% year-over-year.
And lastly, I’m pleased to announce that East West Bank has once again been
selected by Bank Director Magazine as the number one performing bank above $50
billion in assets. This is the second consecutive year we have earned the top
spot and is our third title in the past four years. This achievement is a
testament to the steady execution of our associates and demonstrates our
resilience in what proved to be a challenging year for the banking sector.
I will now turn the call over to Chris to provide more details on our second
quarter financial performance. Chris?
Christopher Del Moral-Niles
Thank you, Dominic. Turning to loans on Slide 4, end-of-period loans grew 2%
quarter-over-quarter, with overall growth in line with our expectations. C&I
growth was driven by notable increases in Entertainment Lending and overall C&I
utilization levels. However, our growth came very late in the second quarter. We
expect C&I to continue to grow over the back half of the year, but likely at a
more moderate pace.
Residential mortgage production was consistent and our pipeline levels remain
strong going into Q3. We expect residential mortgage will continue to be a
growth driver at present levels.
In commercial real estate, we saw healthy growth in multifamily in Q2, offset by
declines in the remainder of the CRE portfolio. We are continuing to work with
our longstanding clients, but foresee very modest CRE loan growth for us for the
balance of 2024.
Moving on to deposits on Slide 5, we grew end-of-period deposits by 2% to a new
record level of $60 billion, with growth coming across all of our customer
groups. Q2 marks the fourth consecutive quarter of $1 billion-plus customer
growth, reflecting our focus on full relationships. Notably, our end-of-period
non-interest-bearing deposit mix remains stable at 25%.
Switching to margin, Slide 6 covers our margin and net interest income trends.
Second quarter dollar net interest income totaled $553 million, while our net
interest margin was 3.27%. As expected, NIM compression for the quarter
reflected higher overall deposit and funding costs, partially offset by
improving mostly fixed-rate asset yields. As we move through the second half of
the year, we expect NIM to grind marginally lower before bottoming out.
Nonetheless, increasing asset growth is expected to drive growing dollar NII
through the back half of the year.
Slide 7 summarizes our non-interest income trends. We achieved a record level of
fee income, $77 million this quarter, up $6 million or 8% from the prior
quarter, with growth in every fee category.
I think that says a lot. With that, let me turn the call over to Irene.
Irene Oh
Thank you, Chris, and good afternoon to all on the call. On Slide 8, credit
trends remain stable and the asset quality of our portfolio remains strong. As
Dominic mentioned earlier, we recorded net charge-offs in the second quarter of
$23 million or 18 basis points annualized, compared to $23 million or 17 basis
points annualized in the first quarter of 2024.
Quarter-over-quarter, non-performing assets rose by 4 basis points to 27 basis
points of total assets, primarily due to increases from C&I loans and commercial
real estate loans we have foreclosed on. Nonetheless, the absolute level of
non-accrual loans and non-performing assets remains relatively low and at
manageable levels.
Criticized loans decreased during the quarter by 10%, driven by decreases in
both special mention and substandard loans. The special mention loan ratio
decreased 22 basis points quarter-over-quarter to 0.83% of loans and the
classified loans ratio decreased three basis points to 1.22%. We recorded a
higher provision for credit losses of $37 million in the second quarter,
compared with $25 million for the first quarter.
With regards to commercial real estate loan maturities, as of June 30, 2024, 5%
of outstanding balances are scheduled to mature by the end of 2024 and 10% of
outstanding balances will mature in 2025. For office loans specifically, 8% of
outstanding balances will mature in 2024 and 16% will mature in 2025. We remain
vigilant and proactive in managing our credit risk. Based on what we know today
we continue to expect quarterly net charge-offs to be in the range of 15 basis
points to 25 basis points for the foreseeable future.
Turning to Slide 9, the total allowance for loan losses increased $14 million
quarter-over-quarter, driven by the expected economic outlook and also loan
growth during the quarter, resulting in allowance for loan losses coverage ratio
of 1.30%.
Within commercial real estate, we increased the reserve for office loans by $7
million, bringing the total coverage ratio to 3.10% of office loans. We believe
our loan portfolio is appropriately reserved as of June 30, 2024.
Turning to Slide 10, all of East West’s regulatory capital ratios remain well in
excess of regulatory requirements for well-capitalized institutions and well
above regional bank averages. East West’s common equity Tier 1 capital ratio
stands at a robust 13.7%, while our tangible common equity ratio is at 9.4%.
These capital ratios place us among the most well-capitalized banks in the
industry.
East West repurchased 560,000 shares of common stock during the second quarter
for approximately $41 million at an average price under $73 a share. We
currently have $49 million of repurchase authorization that remains available
for future buybacks. East West’s third quarter 2024 dividend will be payable on
August 16, 2024 to stockholders of record on August 2nd.
I will now turn it back to Chris to share our outlook for the 2024 full year.
Chris?
Christopher Del Moral-Niles
Thank you, Irene. Our full year outlook remains largely unchanged from the first
quarter. We are still assuming the forward curve as of this quarter end and
currently expect a first rate cut in September.
We continue to expect full year end-of-period loan growth in the range of 3% to
5%. We expect full year net interest income to decline in the range of 2% to 4%.
We also continue to expect adjusted non-interest expense to increase in the
range of 6% to 8%.
Regarding tax items, we now expect for the effective tax rate to be lower in the
range of 21% to 23% versus the prior range of 23% to 24%. We also now expect
full year tax credit amortization expense to be within the range of $60 million
to $65 million.
With that, I will now open the call to questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question comes from Dave Rochester
with Compass Point. Please go ahead.
Dave Rochester
Hey. Good afternoon, guys.
Dominic Ng
Good afternoon, Dave.
Dave Rochester
I wanted to start on fee income. You guys had highlighted this earlier. You had
a solid quarter there with some pretty broad-based growth. So, I was hoping you
could talk about what you’re expecting for that trajectory in the back half or
what you’re thinking for the full year in terms of growth overall.
Christopher Del Moral-Niles
Sure. So, we’ve had about 10% full year year-over-year growth through the
midpoint. And when I think about the core drivers of that, obviously, deposit
account fees are the biggest component and that’s also been growing at that same
pace, and it’s been growing, call it, in the range of a $1 million a quarter. I
don’t know that that will continue in a declining rate environment immediately,
but it should bode well going for another quarter or so.
Lending fees are a function of lending growth, and I think, we commented that we
expect lending to moderate over the back half of the year. So, I would expect
that to be the case and derivatives goes along with lending to a certain extent.
FX has been a wonderful piece of our business that’s contributed greatly this
quarter. It does have some volatility, and the wealth management fees, which
have grown very nicely, have obviously been benefiting from the backdrop of
positive overall equity markets and a strong fixed income yield opportunity.
Again, that will probably moderate to some extent as we look over the back half
of the year.
Dave Rochester
Okay. So, all in, maybe a little bit of moderation, but still looking for some
decent growth there, it sounds like.
Christopher Del Moral-Niles
It’s a core focus of us to drive overall fee income levels higher over time.
Dave Rochester
Okay. Maybe, appreciate that. Maybe it’s my follow up on capital. Last quarter,
I know you were talking about a target TCE ratio range around where it is right
now, 9.3%, 9.4%. Any changes to the thinking on that and should we expect that
range for at least the back half of the year?
Christopher Del Moral-Niles
I think we continue to believe it’s not in our or our shareholders’ interest for
us to wear out the additional capital beyond these levels. Obviously, it will
bounce around a few basis points, but we’re trying to be thoughtful about
managing that in the best interest of returns.
Dave Rochester
All right. Great. Thanks, guys.
Operator
The next question comes from Jared Shaw with Barclays Capital. Please go ahead.
Jared Shaw
Hi. Good afternoon.
Dominic Ng
Good afternoon, Jared.
Jared Shaw
Maybe just looking or starting with margin and taking into account the strong
growth that you just pointed out in C&I at the end of the quarter, as well as
maybe some of the dynamics around potentially getting to the end of a deposit
remix pressure. How should we be thinking about margin over the next few
quarters with that backdrop?
Christopher Del Moral-Niles
Yeah. We still expect margin to have some downward compression over the back
half of the year. We’re not sure if the trough will come in Q3 or Q4, but we
think it does trough later this year.
That having been said, while we think margin will come down a bit, we do see
dollar NII growing precisely because the balances grew here in the second
quarter and we still see incremental growth, although, at a more moderate pace
in the third and fourth quarters. So balance sheet growth will keep the NII
moving higher, NIM will still see compression and we expect it to trough as we
get later in the year.
Jared Shaw
Okay. And is that margin compression, I guess, coming more from just some tail
on funding costs or are you not getting maybe the same spreads on the
incremental C&I loan as you have in maybe the existing portfolio?
Christopher Del Moral-Niles
I think we expect some downward compression on fixed rate assets as the
expectation for a Fed cut comes into play and so the higher yields, for example,
that we’ve been earning here more recently on mortgages will start to come down
and some other fixed rate options, as well as fixed rate investments, those will
put incremental downward pressure on the fixed rate asset repricing.
At the same time, we don’t think the Fed cut, which probably won’t come until
mid-September, will do much to dampen the near-term deposit costing that we have
to roll over here in the third quarter. So you’ll recall we had a fairly
significant first quarter Lunar New Year CD campaign. We’re out there today
growing deposits and managing that, but it’s not at a 25 basis points or 30
basis points lower level because rates haven’t really moved that far down.
Jared Shaw
Okay. All right. Great. Thanks. And then maybe as my follow-up, just on credit,
any color around sort of the dynamic with C&I NPLs up but criticized down? Any
broader trends there or are those more one-off?
Irene Oh
Yeah. I would say, I mean, obviously, those levels, they’re off very low basis.
So there are loans that we’re looking at and borrowers that we’re looking at
carefully for C&I, and then also CRA as well, but there is nothing, I would say,
that’s systemic at this point, industry concentrations, unions or anything we’re
overly concerned about.
Jared Shaw
Great. Thanks.
Operator
The next question comes from Casey Haire with Jefferies. Please go ahead.
Casey Haire
Great. Thanks. Good afternoon, everyone.
Dominic Ng
Good afternoon, Casey.
Casey Haire
So, I guess, another follow-up on the NIM. So, if we do get this trough in the
back half of the year, like, what is the expectation if the forward curve plays
out as is? Is it NIM stability with CD repricing benefits and maturing hedges
offsetting the pressure you feel on the floating rate loan book? Just a little
color on what happens post second half here.
Christopher Del Moral-Niles
Yeah. So order of magnitude, I think, we’ve said that for every 25-basis-point
rate cut, we would assume there’d be something in the neighborhood of $2 million
to maybe $3 million of downward pressure from the rate cuts. But we’ve also said
we expect about a 50% deposit beta baked into those numbers. So I think those
are two things that are in play in our forward look.
With both of those assumptions baked in, given the growth that we see ahead of
us, we think the answer is rising dollar NII, fairly consistently third quarter
into fourth quarter, and margin coming down again modestly from current levels
down into a slightly lower 3.20% [ph] range and then finding its footing and we
assume moving higher, particularly as a number of negative cash flow hedges that
currently weigh on us come off in the first quarter of 2025.
Casey Haire
Got you. Okay. And then just the loan growth outlook. It sounds like you guys, I
mean, obviously, the CRE, you guys are holding the line on that near-term and
enjoying the C&I and resi growth, but it sounds as if you are looking to open
that up or get reengaged in commercial real estate in 2025, unless I’m
misreading that. But just wondering where CRE concentration, what’s the strategy
there, like, when can you turn that back on? Is there a certain level?
Christopher Del Moral-Niles
Well, to be clear, we’re always here for our core customers and we’re always
engaged to support them. We just haven’t been pursuing marginal new
transactions. And so we will continue to engage with our core customers and
service our portfolios and help them with whatever comes their way.
With regard to the overarching loan strategy, I think, Dominic has articulated a
long-term plan to get to a third, a third, a third, and that will involve us
growing our C&I and residential portfolios over time at a faster clip than CRE.
Dominic Ng
I just want to add one additional comment here is that, we -- it’s not like that
we are looking for marginal business in the past and now we’re not. It’s really
coming back to the issue is that our core customers don’t really see a lot of
their interesting activity for them to engage in. So our volume on CRE has
dropped a lot. No, this is simply because of the fact that, there’s just not a
lot of great deals out there.
So we expect CRE activities will probably continue to slow simply because of the
external environment factor. And so, our position is that we always have the
capital and the balance sheet to support our core customers in any kind of
economic environment. But for them to be our core customers that worthy of
support, they obviously are the people that are very savvy and know what they’re
doing. And so they wouldn’t be foolishly getting involved in transactions that
don’t make sense.
So, that’s why the volume of C&I to CRE, et cetera, very much tied into to a
certain extent the interest rate environment and also the economic
circumstances. And so that’s how we see utilization in C&I also relatively low
for the last couple of years, simply because for this kind of interest rate,
it’s hard for people to draw down, because the cost of borrowing is so much
higher.
So, all in all, I think, that that’s the beauty of having strong capital and
strong balance sheet and be in the position to always take good care of our
customers. These good customers in turn will continue to take care of us.
Operator
The next question comes from Ebrahim Poonawala with Bank of America. Please go
ahead.
Ebrahim Poonawala
Well, good afternoon.
Dominic Ng
Good afternoon.
Ebrahim Poonawala
I guess maybe first one just click on like Slide 22. So, you saw some mixed
shift from cash into securities during the quarter. Is that kind of steady state
just remind us, one, when we think about securities to earning assets, are we
where we want to be? And then in terms of the level of cash you want to be
holding, is the $4 billion relative to the $16 billion the right sort of level
to think about?
Christopher Del Moral-Niles
Yeah. And I think we said last quarter, we thought the overall cash and
securities, and we kind of look at that as one basket would stay relatively
stable relative to the total balance sheet. And I think that’s really happening
on an average basis. The amount that can be invested, I think, from a variety of
factors, probably, doesn’t come down a lot off of the $4 billion in cash
components, but could come down a little bit more. We certainly have the
bandwidth and flexibility to do that, but we’re not pushing that where, again,
our focus is on core customer activity, core loan growth, core deposit growth,
and I think that will shape most of the change in the balance sheet over the
back half of the year.
Ebrahim Poonawala
Got it. And I guess, just the other one, maybe Dominic, for you, just sentiment
among your commercial customers as we think about maybe getting a September rate
card, you’re going to get through the elections. Do you see those being a
trigger where we could see an acceleration in loan growth and loan demand? Like,
do you feel there is some pent up demand that could lead to a rebound in sort of
loan growth looking into 2025? And is the beginning of the rate cut cycle and
elections enough to do that?
Dominic Ng
Well, based on the current expectation on the rate cuts, I wouldn’t think that
the rate cut will be sort of like significant enough that can really move that
much of a needle. The fact is 25-basis-point cut here and there. I mean, if we
-- even if we do it 2 times to 3 times, it’s less than 1%, and when we’re
sitting at 5.5% set fund rate. I don’t think that’s material enough to really
drive a lot of excitement in terms of making investment and whatnot.
So, and then also, well, election is something no one knows right now. I mean,
there’s a lot of drama going on. So we’ll just all have to watch it and see how
it goes and then see how would that affect business sentiment. But at this stage
right now, my expectation is still going to be everything stays more or less the
same here. It’s like maybe it’s exactly what the Fed is driving, soft lending. I
think that’s what it looks like. It’s going in that direction.
So far, business still seems to be holding up pretty good. But no one’s going
out there trying to aggressively chase new business at this point and I expect
that’s going to be the way it is for the fourth quarter and possibly even the
first quarter, and then we’ll see how election may affect policy and so forth.
Ebrahim Poonawala
Okay. Thank you.
Operator
The next question comes from Brandon King with Truist Securities. Please go
ahead.
Brandon King
Hey. Good evening.
Dominic Ng
Good evening, Brandon.
Brandon King
So -- yes. So from what I understand, residential is going to lead loan growth
in the back half of the year. So could you just talk about what you’re seeing in
that category as far as demand? I know there’s concerns about housing supply. I
know you have a unique product. But just give us some context behind your
outlook of driving growth for the back half of the year and how sensitive that
could be to interest rate moves and other things?
Christopher Del Moral-Niles
Yeah. And let me just make sure we’re clear. Residential growth will continue to
be a consistent contributor to the growth at about the pace it’s been here over
the first half of the year into the second half of the year. Our pipelines
already here in the third quarter would support that. I don’t see that
necessarily shifting much in our outlook. C&I will be, as was today, this
quarter, is a prominent contributor to the quarter. It will moderate, but it
could also still be a good contributor to the overall growth.
We do have a unique product offering and one way to think about it is most of
our borrowers are only borrowing $0.50 on the $1. And so by definition, they’re
sort of five-eighths as rate sensitive as your typical 80% LTV borrower. And
therefore, we have not seen the same downdraft in overall origination activities
and we think that will hold here. As Dominic mentioned, we don’t think a rate
cut or two will make too much difference to the outlook and those people that
are coming to us pursuing the American dream of home ownership are not going to
be turned away or more excited necessarily by give or take 25 basis points.
Brandon King
Got it. Got it. Okay. And then in regards to the NIM commentary, I think, you
briefly mentioned kind of CD repricing, particularly the Lunar New Year
deposits. Could you just give us some context as to what you’re expecting as far
as CD repricing in the back half of the year and how dependent that is on rate
cuts or not?
Christopher Del Moral-Niles
The bulk of the Lunar CD pricing and the CD pricing driver in the first quarter
was at a rate of 5.25%. Our current special offerings today are at 5% and 4.88%.
And we therefore expect that we will be able to reprice somewhat lower. But
that’s also a function of all that coming through and most of that activity is
sort of February into March. So the proof will be in August and into September
when those come off and we think right now we have a competitive rate that will
keep us managing and maintaining those balances. But we’ll see how that plays
out over the next 45 days.
Brandon King
Got it. Thanks for taking my questions.
Dominic Ng
Thank you.
Operator
The next question comes from Timur Braziler with Wells Fargo. Please go ahead.
Timur Braziler
Hi. Good afternoon.
Dominic Ng
Yeah. Good afternoon.
Timur Braziler
Sticking with a line of questioning on deposits, nice reversal in trends within
DDA. Is that sustainable going forward? Do you think that we’ve kind of troughed
within excess liquidity exiting the balance sheet or is there still some risk
maybe in the back end of the year that there’s some more migration in that line?
Christopher Del Moral-Niles
We definitely see it as rate dependent, and so what we’ve said previously and we
still believe to be the case is as long as rates remain elevated, there will be
incremental push for deposit migration. That did somewhat slow here in the
second quarter. It will pop at the end of the quarter. But the trend would be
still somewhat negative migration until the rate cuts start, and at that point,
as expectations dip lower, we think the incremental bid away from money market
funds and from other offerings will be less enticing and result in less
migration and even possibly stabilization and then subsequent reversal. And we
think that’s our modeling view, but we also see anecdotally that other banks
have reported similar stabilization and we think that’s consistent with industry
trends.
Timur Braziler
Great. And then maybe following up on Ebrahim’s question, just looking at some
of the uncertainties with the election, I’m just wondering if your Greater China
clientele are maybe pulling forward some of the activity and anticipation of
some of the uncertainty maybe in the back end of the year. I guess what is the
temperature gauge of your Greater China client base and how are they thinking
about the election risk or lack thereof in the back end of the year?
Dominic Ng
Well, if you look at our Greater China customers, I think that, I don’t think
they have a much big anticipation of what’s going to come out from the election
one way or the other. And I mean, as we looked at, interesting enough for the
last eight years under two different administrations and if you look at the
tariff started in 2017, but then in the current administration, not only does it
keep going on, in fact, it added a little bit more. So, but then if you take a
look at East West Bank, we haven’t really stopped growing our cross-border
business and we consistently outperform all our peer groups in terms of
financial performance.
I think it all gets down to, at the end of the day, despite political rhetoric
and there are certain U.S.-China geopolitical issues, when it gets down to
national security, et cetera, the common goods that have been shipped between
U.S. and China, import and export, really hasn’t slowed down that much. There
are a lot of business still, commerce, they’re going back and forth.
And I would say that the vast majority of the business are really business going
as usual. They don’t like to hear those rhetorics. However, the business is
still going as usual. So what we found is that many of our customers, whether
they’re in import business, export business, from the Greater China region or
U.S. to Asia region, and they continue to do business. They continue to find
ways to do business.
And we at East West continue to navigate in this rough sea and somehow
understanding the dynamic and I think we’ve done a pretty good job in managing
this overall U.S. geopolitical situation. And that’s why we uniquely find a way
to continue to be one of the highest performing banks in the country, simply
because we know what we’re doing and we continue to go on through eight years.
For many others, we looked at significant turmoil, but for us, somehow we get by
just fine. And this is something that we feel very confident. In the next four
years, eight years, I don’t know who’s going to be the President. It really
doesn’t matter to us because we’re here to run East West Bank. We know how to
run our business, and so far, so good.
Timur Braziler
Great. Thanks, Dominic.
Dominic Ng
Thank you.
Operator
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark
Hi. Thank you. First one for me is just around capital. Given that you’re not
looking to accrete more capital at this stage, should we just assume you re-up
the buyback when you’re done or are you more price sensitive at this level? And
then if not, any other ways to return capital that you might be considering?
Christopher Del Moral-Niles
Well, to begin with, we’ve always been both opportunistic and shareholder
friendly and those guiding principles will remain. During the quarter, I think,
we were fairly opportunistic in the repurchases we did. We didn’t fully utilize
what we have left. We have $49 million yet to go and we’ll continue to look at
it on an opportunistic basis. We would not expect to reauthorize until we’ve
exhausted our current program and so we’ll update you as that comes together.
Matthew Clark
Okay. But you’re not considering any other types of capital return at this stage
other than organic growth?
Christopher Del Moral-Niles
We traditionally look at our dividend on an annual basis and we’ll obviously
look at that as we look to our expectations for 2025. And I think, obviously,
our first and foremost use of capital is to support our customers. That’ll
always be our first use of capital. We are not currently contemplating any
meaningful M&A activity and we certainly think about the other uses of capital
in a shareholder-friendly manner.
Matthew Clark
Okay. Great. And then another question just on the loan side. I think you hired
the Head of Entertainment Lending from Citi National in the last two months to
three months.
Christopher Del Moral-Niles
In the first quarter.
Matthew Clark
Have they contributed to that -- in the first quarter. Okay. Have they
contributed to that Entertainment growth yet and how large of a contributor
would you like that vertical to be or what’s your limit in that vertical?
Christopher Del Moral-Niles
Yes. They have already contributed. And yes, one of the key drivers of growth in
our C&I business for this quarter was an uptick in Entertainment Lending. And I
think we like all of our verticals, but we particularly like the Entertainment
vertical being based here in the Los Angeles region. Dominic, anything you’d
care to add?
Dominic Ng
I’m sorry?
Christopher Del Moral-Niles
Anything you’d care to add?
Dominic Ng
Oh! Well, I think that as much as we always like to have various industry
verticals to continue to excel, but we at East West Bank very much put overall
risk oversight as a priority. That’s why, if you reflect back in March 2023, we
didn’t have the kind of problems like some of the other larger banks had in
California, because we did not overload ourselves with private equity, venture
capital. Not that we didn’t like the business. We love those businesses. We’re
doing good with those businesses. But we’ll never allow us to overextend to one
particular industry that potentially, when there is a run or here and there,
that causes harm.
So I very much expect the Entertainment business to continue to grow, not only
in the United States, but also in the Greater China region. We expect the
Entertainment business to grow in a very healthy pace, with the exception that
we’ll never allow it to grow so much that it becomes over-concentrated. That
potentially causes regret someday when there’s so much concentration in one
particular industry.
So, East West always runs a very diversified portfolio. As you can see, actually
quarter-by-quarter, we always have different winners. When Chris talked about
this quarter is Entertainment and something else, next quarter will probably be
somebody else again. It’s nice to see those different units all competing
positively to get that championship for a quarter. So, and by doing that, we
don’t have an issue of over-concentration.
Matthew Clark
Great. Thank you.
Dominic Ng
Thanks.
Operator
The next question comes from Chris McGratty with KBW. Please go ahead.
Chris McGratty
Oh! Thanks. I noticed several times on the call you talked about the optimism
for the fee income outlook. Is there a scenario where there could be a tuck-in
acquisition and use of capital to grow that business?
Christopher Del Moral-Niles
There could be, and obviously, last year, Chris, you’ll recall the company made
a significant investment in Reliant, the asset management entity that we took
the 49% stake in. And so those types of opportunities may present themselves,
but it’s not top of the agenda as we sit here today looking forward.
Chris McGratty
Okay. And Chris, while I have you, I just want to get a little bit of a better
understanding on Slide 6 where you talk about the $1 billion of cash flow hedges
that come off in the first quarter at the negative carry and then the hedges and
the spec cap. How should we think about just the impact on margin and NII from
those actions in next year?
Christopher Del Moral-Niles
So the current cash flow hedges are costing us, if you look at the top of that
page, the impact is about $25 million a quarter and it’s pulling down the NIM by
about 15 basis points in the current period and those hedges largely expire come
Q1 2025. And so essentially that negative drag will work its way down. Of
course, if there’s a rate cut in September and additional ones in the Q4, it’ll
incrementally chip away at that, but that whole amount will come off Q1 2025.
And what will happen then is somewhere in the second half of the year, a billion
of new hedges will come on with a blended average receive of four. So the extent
by the middle of 2025, the Fed’s down to 4% [ph], no harm, no foul. If it’s
above there, it’ll cost us a little for the interim. If it’s below there, we’ll
see the benefit of that in our bottomline beginning in the second half of 2025.
Chris McGratty
Perfect. Thank you.
Operator
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner
Thanks. Good afternoon. I just wanted to…
Dominic Ng
Hi, Gary.
Gary Tenner
… ask on the loan side, on the C&I side in particular, Christopher, your mention
of the surge late quarter. I don’t think I’ve heard you comment on this, but I’m
wondering if there’s any through line in terms of types of loans, business
purpose, a commentary from borrowers that you think kind of drove that surge?
Christopher Del Moral-Niles
There was a little bit more activity late in the day from some private equity
and one particular biotech related entity. And I think we were a little bit
surprised by the volatility, but it was positive, so we took it. And I think
we’ve seen some of that activity move back already, which was not exactly what
we expected, but a bit of volatility. But nonetheless, we expect to grow
balances in total throughout the third quarter and the fourth quarter.
Gary Tenner
Okay. Great. And then if you could update us on the thoughts around the FHLB
borrowings you have that replace the BTFP. Is that purely going to be a function
of liquidity trends over time in terms of paying that down or is there a more
specific focus on that?
Christopher Del Moral-Niles
I think we’re focused on making sure we get past sort of this rollover period
here with the CDs in Q3. And if we continue to see positive trends, which we
have seen and continue to see so far into the Q3 period, additional on-coming --
on-boarded customers on the deposit side, we’ll consider where we put those
incremental dollars to work, whether that’s to earn cash at the Fed or pay down
liabilities. It’s about a push. So, we’ll look at that and put the money to
work, obviously, every day.
Gary Tenner
Thank you.
Christopher Del Moral-Niles
That having been said, I would expect that we’ll keep a good portion of that
FHLB outstanding for an extended period of time, as we think that’s going to
become a component of what otherwise maintains a very strong liquidity profile.
Operator
The next question comes from Samuel Varga with UBS. Please go ahead.
Samuel Varga
Good afternoon. I just wanted to go back to the deposit conversation for a
little bit. Could you provide an update on Private Banking deposits, and
specifically, I guess, how they’ve trended over the past 12 months and what sort
of growth you anticipate over the next 12 months to 18 months?
Christopher Del Moral-Niles
Yeah. Our Private Banking participated -- customers participated in our CD
specials and have found that a positive place to put incremental balances of
work and so those balances have generally grown. We expect them to likely
continue to grow as wealth management solutions overall have grown nicely, and
as they come in, they allocate a portion of their portfolio or they reallocate
record equity levels into fixed income and stable products and that has
generally been a win for us.
Dominic Ng
I think Private Banking continues to bring in new customers and they are new
customers both from the fee income perspective, in terms of wealth management
product side and also on the deposits and loans.
Samuel Varga
Great. Thanks for that. And just piggybacking off of that, on the wealth
management side, can you just share sort of broader thoughts around this
business? Where do you see it going on the wealth management over the next
couple of years? What sort of opportunities are there in the market from
disruption that you’d like to take advantage of?
Dominic Ng
I think on the wealth management area we see tremendous potential for East West
Bank. Our approach is not to try to do a quick hit and -- but rather take our
time to strategically plan it in the right way and then have gradual,
sustainable, recurring and profitable type of business.
So far, it’s been going good. I mean, oftentimes people may look at our overall
wealth management fee income. It’s really not at a very high level from a
percentage standpoint to our overall profitability, but we’re trying to grow it
in the right way.
And we see a tremendous opportunity and potential for the demographic of the
customers that we have so far and we just see that there’s just going to be
great opportunity, not only just here in the United States and even potentially
in Asia area.
Samuel Varga
Thanks for taking my questions.
Operator
The next question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell
Hey. Good afternoon.
Dominic Ng
Good afternoon.
Andrew Terrell
Most of mine were addressed already, but just a quick modeling question. Chris,
can you remind us the repricing dynamics on the securities portfolio? Just how
much of that is floating rate at this point and then what does the quarterly
cash flow look like?
Christopher Del Moral-Niles
Sure. So, it’s roughly 60-40 on the overall mix, 60% fixed, 40% floating. The
floating is all Ginnie Mae floaters at SOFR plus, I’ll call it 115 for
conversation. And the cash flow on a recurring monthly basis is $110 million to
$120 million, obviously, with some variability.
Andrew Terrell
Got it. Okay. And then do you have the offhand, just the yield on the securities
purchased during the second quarter? Just trying to think about where the
securities yield heads into 3Q?
Christopher Del Moral-Niles
Yeah. There was about $200 million of fixed at, call it, 5.5-ish and there was
the balance was all floaters at SOFR plus 115-ish.
Andrew Terrell
Perfect. Thank you for taking the questions.
Christopher Del Moral-Niles
Yeah.
Operator
Next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia
Hey. Good afternoon.
Christopher Del Moral-Niles
Good afternoon.
Manan Gosalia
I wanted to ask on the spreads that you’re getting on your new loans. Some of
your peers have highlighted that there’s tougher competition from both banks and
non-banks, and that’s putting pressure on C&I spreads. Is that something you’re
seeing in your portfolio as well?
Christopher Del Moral-Niles
Yeah. I think we’re seeing C&I generally in the SOFR plus 250 zone for most of
the stuff that we’re putting on balance sheet. I don’t know that that’s atypical
for the traditional business range that we’ve done, but that’s where we’re
seeing it.
Manan Gosalia
Got it. And then on the commercial real estate front, can you talk about what
your conversations have been like with borrowers? Do you think two or three rate
cuts from here will alleviate some of the pressure that they’re feeling,
especially on the office and multifamily side? And more recently as you’ve maybe
extended or whichever loans have come up for extension, what has been the
reaction from the borrowers? Have they brought in more equity? Just looking to
get to more color there. Thanks.
Christopher Del Moral-Niles
So as Dominic said a few minutes ago, I don’t know that a rate cut or two will
make that much difference in the near term. And so if rates are elevated in the
5%-plus ZIP code for an extended period of time on the base rate, it’s likely
there will be pain to be felt by a number of borrowers, many of whom bought into
projects at cap rates of 5% a few years ago. So that’ll be a challenge for many
of them.
We have taken a very hard look with Irene and Dominic, but also obviously our
credit teams and our RMs, et cetera, all the way down to figure out what’s
coming due, what’s the situation, where are the cash flows, where’s the debt
service coverage, what else can we do with these customers that are up for
renewal from now through the end of 2025 has been the primary focus, but looking
at things even beyond that just to make sure that we’re on top of things.
So I think the short answer is we’re doing all of the above to make sure that
we’re proactive and ahead of it. It is an issue, but to the extent that rates
come down, not one or two cuts, but 100 basis points, 150 basis points, things
get easier. And obviously if rates come down 200 basis points, well, probably
there’s a lot of issues that just go away.
Irene Oh
I’ll just add to it. Certainly the macro environment for office, it is what it
is, but this continuous review of the portfolio, this is something we started
before the pandemic and the efforts that we did there for borrowers to kind of
shore up, pay down loans, pledge additional assets, what have you. So today I
think if you look at the results that we have, the still very, very good credit
quality across the Board, a lot of that is the proactive actions that we took
years ago.
Manan Gosalia
Got it. And what matters more? Is it the belly of the curve or is it the short
end of the curve for that?
Christopher Del Moral-Niles
Can you reframe the question, Manan?
Manan Gosalia
Oh! Just in terms of more…
Christopher Del Moral-Niles
I am sorry. Yeah. Short end, yeah, the vast majority of our customers are
floating rate borrowers and while they might fix their need to refinance, if
they can, we’ll be best met on the short end.
Manan Gosalia
Got it. Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the
conference back over to Dominic for any closing remarks.
Dominic Ng
I just wanted to thank everyone for joining us on the call today and we are
looking forward to talking to you again in October. Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.
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ABOUT EWBC STOCK
SymbolLast Price% Chg
EWBC
East West Bancorp, Inc.
86.872.91%
* 1D
* 5D
* 1M
* 6M
* 1Y
* 5Y
* 10Y
*
Created with Highcharts 11.2.0Jul 22Jul 23Jul 24Jul 2575808590
Market Cap
$11.75B
PE (FWD)
10.28
Yield
2.44%
Rev Growth (YoY)
0.22%
Short Interest
2.93%
Prev. Close
$84.41
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