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East West Bancorp (EWBC) Rides on High Rates Amid Rising Costs
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East West Bancorp, Inc. (EWBC - Free Report) is well-positioned for revenue growth on the back of steady loan demand, higher rates and sustained client acquisition efforts. However, an escalated expense base and weak asset quality remain near-term headwinds.
EWBC’s organic growth strategy is reflected in its net interest income (NII) growth trajectory. Despite a dip in its NII in 2020 (owing to a tough operating backdrop), the metric witnessed a compound annual growth rate (CAGR) of 12% over the last four years ended 2023 on the back of an increase in loan balances and higher rates.
Amid the rate-cut outlook, management expects NII to experience a dip in the range of 4-6% in 2024. Nonetheless, down-rate protection hedging initiatives and sustained efforts to acquire low-cost deposits are expected to support NII. Modest loan growth and loan diversification efforts are also likely to aid NII going forward. We project NII to witness a CAGR of 1.7% by 2026.
The current high-interest rate environment is likely to support East West Bancorp’s net interest margin (NIM), while higher funding costs will exert pressure. Since March 2022, the Federal Reserve hiked interest rates 11 times to the current 22-year high level of 5.25-5.5%. The company’s NIM witnessed a rise in 2023 to 3.61% compared with 3.45% in 2022 and 2.72% in 2021.
Higher funding costs and probable interest rate cuts are likely to exert pressure on NIM expansion, while decent loan demand and balance sheet hedging strategies will offer some support. We project NIM to reduce to 3.38% in 2024 with a subsequent recovery to 3.47% and 3.66% in 2025 and 2026, respectively.
East West Bancorp’s fee income has witnessed a steady improvement in the past few years. The metric witnessed a four-year (2019-2023) CAGR of 10%. Additionally, deposit account fees and lending fees remained the key contributors, contributing 32.8% and 30.7% to the total fee income during 2023, respectively. Management’s efforts to grow deposits and loans through sustained client acquisition are likely to boost fee income via deposit account fees and lending fees. In 2024, we estimate deposit account fees and lending fees to rise 6.3% and 6.2%, respectively.
EWBC currently carries a Zacks Rank #3 (Hold). Shares of the company have gained 39.6% over the past six months compared with the industry’s growth 15.8% growth.
Image Source: Zacks Investment Research
Nevertheless, the company has been witnessing a steady increase in expenses. Though the metric declined in 2020, the same witnessed an 8.6% CAGR over the last four years (2019-2023). Expenses are likely to remain escalated due to ongoing investments in technology to improve non-interest income, increased headcount and inflationary pressures. Per our estimates, total non-interest expenses will witness a dip of 1.8% in 2024 with a subsequent rise of 2.8% in 2025.
EWBC’s asset quality has been worsening over the past few years. While the company recorded negative provisions in 2021, the same experienced pronounced growth thereafter given the company’s reserve-building strategy to combat the tough economic backdrop. Provision for credit losses witnessed a CAGR of 6% over the four years ended 2023. We anticipate a similar trend going forward given the deteriorating economic outlook. We project provision for credit losses to surge 22.5% in 2024.
Stocks to Consider
Some better-ranked bank stocks are JPMorgan Chase & Co. (JPM - Free Report) and First Community Corp. (FCCO - Free Report) .
JPM’s earnings estimates for the current year have been revised upward slightly in the past 30 days. The company’s shares have gained 29.4% over the past six months. At present, JPM carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
First Community Corp’s 2024 earnings estimates have moved 9% north in the past 60 days. The stock has lost 3% over the past six months. Currently, FCCO sports a Zacks Rank of 1.
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East West Bancorp (EWBC) Rides on High Rates Amid Rising Costs
East West Bancorp, Inc. (EWBC - Free Report) is well-positioned for revenue growth on the back of steady loan demand, higher rates and sustained client acquisition efforts. However, an escalated expense base and weak asset quality remain near-term headwinds.
EWBC’s organic growth strategy is reflected in its net interest income (NII) growth trajectory. Despite a dip in its NII in 2020 (owing to a tough operating backdrop), the metric witnessed a compound annual growth rate (CAGR) of 12% over the last four years ended 2023 on the back of an increase in loan balances and higher rates.
Amid the rate-cut outlook, management expects NII to experience a dip in the range of 4-6% in 2024. Nonetheless, down-rate protection hedging initiatives and sustained efforts to acquire low-cost deposits are expected to support NII. Modest loan growth and loan diversification efforts are also likely to aid NII going forward. We project NII to witness a CAGR of 1.7% by 2026.
The current high-interest rate environment is likely to support East West Bancorp’s net interest margin (NIM), while higher funding costs will exert pressure. Since March 2022, the Federal Reserve hiked interest rates 11 times to the current 22-year high level of 5.25-5.5%. The company’s NIM witnessed a rise in 2023 to 3.61% compared with 3.45% in 2022 and 2.72% in 2021.
Higher funding costs and probable interest rate cuts are likely to exert pressure on NIM expansion, while decent loan demand and balance sheet hedging strategies will offer some support. We project NIM to reduce to 3.38% in 2024 with a subsequent recovery to 3.47% and 3.66% in 2025 and 2026, respectively.
East West Bancorp’s fee income has witnessed a steady improvement in the past few years. The metric witnessed a four-year (2019-2023) CAGR of 10%. Additionally, deposit account fees and lending fees remained the key contributors, contributing 32.8% and 30.7% to the total fee income during 2023, respectively. Management’s efforts to grow deposits and loans through sustained client acquisition are likely to boost fee income via deposit account fees and lending fees. In 2024, we estimate deposit account fees and lending fees to rise 6.3% and 6.2%, respectively.
EWBC currently carries a Zacks Rank #3 (Hold). Shares of the company have gained 39.6% over the past six months compared with the industry’s growth 15.8% growth.
Image Source: Zacks Investment Research
Nevertheless, the company has been witnessing a steady increase in expenses. Though the metric declined in 2020, the same witnessed an 8.6% CAGR over the last four years (2019-2023). Expenses are likely to remain escalated due to ongoing investments in technology to improve non-interest income, increased headcount and inflationary pressures. Per our estimates, total non-interest expenses will witness a dip of 1.8% in 2024 with a subsequent rise of 2.8% in 2025.
EWBC’s asset quality has been worsening over the past few years. While the company recorded negative provisions in 2021, the same experienced pronounced growth thereafter given the company’s reserve-building strategy to combat the tough economic backdrop. Provision for credit losses witnessed a CAGR of 6% over the four years ended 2023. We anticipate a similar trend going forward given the deteriorating economic outlook. We project provision for credit losses to surge 22.5% in 2024.
Stocks to Consider
Some better-ranked bank stocks are JPMorgan Chase & Co. (JPM - Free Report) and First Community Corp. (FCCO - Free Report) .
JPM’s earnings estimates for the current year have been revised upward slightly in the past 30 days. The company’s shares have gained 29.4% over the past six months. At present, JPM carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
First Community Corp’s 2024 earnings estimates have moved 9% north in the past 60 days. The stock has lost 3% over the past six months. Currently, FCCO sports a Zacks Rank of 1.