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East West Bancorp (EWBC) Rides on High Rates as 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 rising operating expenses remain major near-term headwinds.
East West Bancorp’s net interest income (NII), which is the primary source of its revenues, witnessed a 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 the demand for loans, higher rates and modest economic growth are expected to keep aiding NII. We estimate NII to record a CAGR of 16.4% over the next three years. Similarly, loans and deposits are projected to record a CAGR of 6.4% and 1.8%, respectively over the same time period.
Also, the rising rate environment and steady rise in loan demand are expected to support EWBC’s net interest margin (NIM). In the first nine months of 2022, NIM witnessed a year-over-year rise. We anticipate the metric to be 3.38%, 3.81% and 3.77% in 2022, 2023 and 2024, respectively.
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 2-3 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%. The company also has a share repurchase plan in place. As of Sep 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 nine months of 2022. For 2022, management anticipates the provision for credit losses to be $80 million. We anticipate the same to be $79.7 million for 2022, with year-over-year increases of 83.2% and 11.3% in 2023 and 2024, respectively.
Further, 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. Our estimates for total non-interest expenses suggest a CAGR of 8.7% over the next three years.
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East West Bancorp (EWBC) Rides on High Rates as Asset Quality Ails
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 rising operating expenses remain major near-term headwinds.
East West Bancorp’s net interest income (NII), which is the primary source of its revenues, witnessed a 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 the demand for loans, higher rates and modest economic growth are expected to keep aiding NII. We estimate NII to record a CAGR of 16.4% over the next three years. Similarly, loans and deposits are projected to record a CAGR of 6.4% and 1.8%, respectively over the same time period.
Also, the rising rate environment and steady rise in loan demand are expected to support EWBC’s net interest margin (NIM). In the first nine months of 2022, NIM witnessed a year-over-year rise. We anticipate the metric to be 3.38%, 3.81% and 3.77% in 2022, 2023 and 2024, respectively.
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 2-3 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%. The company also has a share repurchase plan in place. As of Sep 30, 2022, $254 million remained available under the buyback authorization, which was announced in March 2020.
Shares of this Zacks Rank #3 (Hold) company have lost 3.8% in the past six months compared with the industry’s decline of 14.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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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 nine months of 2022. For 2022, management anticipates the provision for credit losses to be $80 million. We anticipate the same to be $79.7 million for 2022, with year-over-year increases of 83.2% and 11.3% in 2023 and 2024, respectively.
Further, 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. Our estimates for total non-interest expenses suggest a CAGR of 8.7% over the next three years.