East West Bancorp Inc (NASDAQ:EWBC) (2024)

Operator

Good day, and welcome to the East West Bancorp's Second Quarter 2024 Earnings Call. [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.

A

Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review the 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 8-K filed today.

I will now turn the call over to Dominic.

D

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 have 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 nonperforming 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 #1 performing bank above $50 billion in assets. This is the second consecutive year we have earned a top spot and it's our third title in the past 4 years. This achievement is a testament to the steady execution of our associates and demonstrates our resilience and 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?

C

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 eruption 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 long-standing 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 noninterest-bearing deposit mix remained 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 noninterest 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.

I

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 reported 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, nonperforming app sits 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 nonaccrual loans and nonperforming assets remains relatively low and at manageable levels.

Criticized loans decreased during the quarter by 10% and 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 3 basis points to 1.22. We reported 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 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 130. Within commercial real estate, we increased the reserve for office loans by $7 million, bringing the total coverage ratio to 310 of office loans. We believe our loan portfolio is appropriately reserved as of June 30, 2024.

Turning to Slide 10. All of these West 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 gross well-capitalized banks in the industry. East Watch 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 2.

I will now turn it back to Chris to share our outlook for the 2024 full year. Chris?

C

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 a currently expected 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 noninterest 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?

Operator

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Yes. 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.

J

C

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 25 or 30 basis points lower level because rates haven't really moved that far down.

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Operator

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D

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 have dropped. A lot has -- 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 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 it wouldn't be foolishly getting involved in transaction that don't make sense.

So that's why the volume of C&I to CRE, et cetera, very much tied to a certain extent, interest rate environment and also the economic circ*mstances. And so -- and that's how we see utilization in C&I also were relatively low for the last couple of years, simply because for the excess 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

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C

Yes. 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 certainly 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 component, 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.

E

D

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 points cut here and there. I mean if we -- even if we do it 2x to 3x, it's less than 1%. And when we're sitting at 5.5% Fed 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 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 in soft lending. I think that's what it looks like going in that direction. So far, business seems to be holding up pretty good. And -- 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 in the first quarter. And then we'll see how election may affect policy and so forth.

Operator

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C

Yes. 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, and we don't see that necessarily shifting much in our outlook.

C&I will be as was this quarter as 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 dollar. And so by definition, there's sort [ of 5'ish ] 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 homeownership are not going to be turned away or more excited necessarily by, give or take, 25 basis points.

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Operator

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We definitely see it as rate dependent. And so what we've said previously and we still believe to be cases as long as rates remain elevated, there will be incremental push for deposit migration. That did somewhat slow here in the second quarter, and there was a little 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 model in view, but we also see anecdotally that other banks have reported similar stabilization, and we think that's consistent with industry trends.

T

D

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 8 years, under 2 different administrations. And if you look at the tariff started in 2017, but then -- in the current administration, not only it keep going on, in fact, it adds 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 outperformed all our peer groups in terms of financial performance.

I think it all gets down to, at the end of the day, despite political rhetorics, and there are some U.S.-China geopolitical issue when you get 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. What we found is that many of our customers whether they're an import business, export business from the Greater China region or US to Asia region and they continue to do business. They continue to find way 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 bank in the country simply because we know what we're doing, and we continue to go through 8 years of, for many others, we looked at significant turmoil, but for us, somehow we get by. And this is something that we feel very confident in the next 4 to 8 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.

Operator

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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?

D

C

D

Oh. Well, I think that as much as we always like to have various industry vertical to continue to excel, but we at East West Bank is 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 business. We're doing good with those businesses. But will never allow us to overextend to one particular industry that potentially when there is a run or here and there, they cause us home. 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 never allow it to grow so much. That becomes over concentrated that potentially cause us regret someday when there's so much concentration in one particular industry.

So East West always run a very diversified portfolio. As you can see, actually quarter-by-quarter, we always have different winners. When Chris talked about this quarter, it's entertainment and something else. Next quarter probably be somebody else again. it's nice to see those different units are competing positively to get that championship for the quarter. So -- and then by doing that, we don't have an issue of overconcentration

Operator

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Yes, 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 oncoming -- onboarded 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 some money to work, obviously, every day.

That having been said, I would expect that we'll keep a good portion of the 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

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Unknown Analyst

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Unknown Analyst

D

I think on the wealth management area, we see a tremendous potential for East West Bank. Our approach is not to try to do a quick hit. And 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 a great opportunity, not only just here in the United States and even potentially in Asia area.

Operator

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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 in the projects at cap rates of 5% a few years ago. So that will 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 is 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 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.

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Operator

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Operator