A month has gone by since the last earnings report for East West Bancorp (EWBC - Free Report) . Shares have lost about 5.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is East West Bancorp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
East West Bancorp Q1 Earnings Miss on Higher Costs
East West Bancorp’s first-quarter 2019 adjusted earnings per share of $1.16 missed the Zacks Consensus Estimate of $1.22. However, the figure compares favorably with adjusted earnings of $1.13 reported in the prior-year quarter.
Results were affected by rise in expenses, higher provisions for credit losses and decline in non-interest income. However, improvement in net interest income, and higher loans and deposits acted as tailwinds.
After taking into consideration non-recurring items, net income was $164 million or $1.12 per share, down from $187 million or $1.28 per share in the prior-year quarter.
Revenues Improve, Costs Flare Up
Net revenues were $404.6 million, up nearly 1% year over year. However, the reported figure missed the Zacks Consensus Estimate of $411 million.
Net interest income (NII) was $362.5 million, increasing 10.9% year over year. Further, net interest margin (NIM) expanded 6 basis points (bps) to 3.79%.
Non-interest income amounted to $42.1 million, down 43.4% from the year-ago quarter. This downside resulted primarily from lower deposit account fees, net gains on sale of loans and other income. Excluding net gain from sale of business recorded in the prior-year quarter, adjusted non-interest income was down 2%.
Non-interest expenses flared up 10.5% to $186.9 million. This upswing mainly resulted from higher compensation and employee benefits, deposit-related expense, amortization of tax credit and other investments and other operating expenses.
The efficiency ratio was 46.20%, up from 42.16% a year ago. Notably, rise in efficiency ratio indicates lower profitability.
Loans & Deposits Increase
As of Mar 31, 2019, total loans were $32.9 billion, up 1.5% sequentially. Total deposits increased 2.4% from the end of the previous quarter to $36.3 billion.
Credit Quality Worsens
Annualized net charge-offs were 0.18% of average loans held for investment, up from 0.14% at the end of the prior-year quarter. As of Mar 31, 2019, non-PCI non-performing assets were $138 million, up 5.4%.
Also, provision for credit losses were $22.6 million, up 11.7% from the prior-year quarter.
Strong Capital & Profitability Ratios
Common equity Tier 1 capital ratio was 12.4% as of Mar 31, 2019, up from the prior-year quarter’s 11.9%. Total risk-based capital ratio was 13.8%, up from 13.4% reported a year ago.
At the end of the reported quarter, return on average assets was 1.63%, down from 2.03% as of Mar 31, 2018. Further, as of Mar 31, 2019, return on average tangible equity was 16.53%, down from 22.30% reported a year ago.
Management provided 2019 guidance on assumption of no rate hike this year.
Total loans are expected to be up 10% year over year, mainly driven by growth in key categories of C&I commercial real-estate and single family. Further, the company anticipates deposit growth to support the loan growth.
NII (excluding the impact of discount accretion) is projected to increase in low double digits.
NIM (excluding impact of the discount accretion) is expected to be 3.75-3.80%, based on assumption of no rate hike this year, while the discount accretion is estimated to add 2 bps to GAAP NIM.
Foreign exchange fee income is expected to increase and support non-interest income.
Non-interest expenses (excluding tax credit amortization & core deposit intangibles) are projected to increase in mid-single digits.
Provision for credit losses is estimated to be $80-$90 million.
Effective tax rate is anticipated to be 15%, including the impact of tax credit investments.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
At this time, East West Bancorp has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
East West Bancorp has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.