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East West (EWBC) Gains From Higher Rates, Asset Quality Ails

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East West Bancorp, Inc.’s (EWBC - Free Report) organic growth strategy remains impressive on higher loan demand and rising rates. The company’s capital deployment activities reflect a strong balance sheet and liquidity position. However, deteriorating asset quality and mounting operating expenses remain near-term headwinds.

East West Bancorp’s net interest income (NII), which is the primary source of its revenues, witnessed a compound annual growth rate (CAGR) of 5.8% over the last five years (2017-2021). Over the same time frame, total loans witnessed a CAGR of 9.5% and deposits saw a CAGR of 14%. The continued rise in demand for loans and decent economic growth are expected to keep supporting NII.

Additionally, the rising rate environment and steady rise in loan demand are expected to support EWBC’s net interest margin (NIM). In the first half of 2022, NIM witnessed a year-over-year rise.

Similar to East West Bancorp, several other banks, including Hancock Whitney Corp (HWC - Free Report) and BankUnited, Inc. (BKU - Free Report) , are likely to record a rise in NIM going forward. In fact, HWC management expects every 25 basis points (bps) increase in the Fed Funds rate to widen its NIM by 4-6 bps, while for BKU, NIM is expected to increase, driven by higher rates.

East West Bancorp has a solid balance sheet. This makes the company’s capital deployments sustainable. In January 2022, the company hiked its quarterly dividend by 21%. This followed a 20% hike in January 2021 and April 2019, 15% in July 2018 and 11.1% in January 2015. The company also has a share repurchase plan in place. As of Jun 30, 2022, $254 million remained available under the buyback authorization, which was announced in March 2020.

However, East West Bancorp’s worsening asset quality is a headwind. Provision for credit losses witnessed a CAGR of 65.7% over the four years ended 2020, with the uptrend continuing in the first six months of 2022. For 2022, the company expects the provision for credit losses to be $60-$70 million.

Also, EWBC has been witnessing a persistent rise in expenses. Though expenses declined in 2020, the same witnessed a CAGR of 4.5% over the last five years (2017-2021). Overall costs are expected to remain elevated due to an increase in headcount, inflationary pressure and investments in technology for improving non-interest income.

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