It has been about a month since the last earnings report for East West Bancorp (EWBC - Free Report) . Shares have lost about 15.4% 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 drivers.
East West Bancorp Q2 Earnings Match Estimates, Revenues Improve
East West Bancorp’s second-quarter 2019 adjusted earnings per share of $1.24 were in line with the Zacks Consensus Estimate. Also, the figure was up 5.1% from the prior-year quarter.
Increase in revenues, and continuous improvement in loans and deposits drove results. However, higher provisions for credit losses and slight rise in expenses were on the downside.
Net income was $150.4 million, down 12.7% from the prior-year quarter.
Revenues Improve, Costs Up Modestly
Net revenues were $420.1 million, up 7.7% year over year. Also, the reported figure beat the Zacks Consensus Estimate of $416.4 million.
NII was $367.3 million, increasing 7.5% year over year. However, NIM declined 10 basis points (bps) to 3.73%.
Non-interest income was $52.8 million, up 9.3% from the year-ago quarter. This rise was largely driven by net gains on sales of AFS investment securities, and interest rate contracts and other derivative income.
Non-interest expenses moved up slightly to $177.7 million. Higher compensation and employee benefits, deposit-related expenses, computer software expenses, and other operating expenses were mostly offset by decline in Deposit insurance premiums and regulatory assessments cost and consulting expenses.
Efficiency ratio was 42.3%, down from 45.5% a year ago. A fall in the efficiency ratio indicates improved profitability.
Loans & Deposits Increase
As of Jun 30, 2019, total loans held for investment were $33.4 billion, up 2.6% sequentially. Total deposits increased marginally from the end of the previous quarter to $36.5 billion.
Credit Quality: Mixed Bag
Annualized net charge-offs were 0.09% of average loans held for investment, down from 0.14% at the end of the prior-year quarter.
However, as of Jun 30, 2019, non-PCI non-performing assets were $119.3 million, up 15.3%. Also, provision for credit losses was $19.2 million, up 23.9% from the prior-year quarter.
Capital Ratios Improve, Profitability Ratios Deteriorate
Common equity Tier 1 capital ratio was 12.5% as of Jun 30, 2019, up from 12.2% in the prior-year quarter. Total risk-based capital ratio was 13.9%, up from 13.7% reported a year ago.
At the end of the quarter, return on average assets was 1.45%, down from 1.84% as of Jun 30, 2018. Further, as of Jun 30, 2019, return on average tangible equity was 14.5%, down from 19.5% reported a year ago.
Management provided updated guidance on assumption of two rate cuts this year.
NII (excluding the impact of discount accretion) is projected to increase in high single digits, down from prior guidance of low double digits growth rate.
NIM (excluding the impact of the discount accretion) is projected to be 3.60-3.70%, lower than 3.75-3.80% mentioned previously. Discount accretion is estimated to add 2 bps to GAAP NIM.
Total loans are expected to be up 10% year over year (no change from prior guidance), mainly driven by growth in key categories of C&I commercial real-estate and single family. Further, the company anticipates deposit growth to support loan growth.
Non-interest expenses (excluding tax credit amortization & core deposit intangibles) are projected to increase in mid-single digits (no change from previous outlook).
Provision for credit losses is estimated to be $80-$90 million.
Effective tax rate is anticipated to be 20%, including the impact of the $30.1 million reversal of previously claimed tax credits in the second quarter of 2019 or nearly 15%, excluding the tax credit reversal.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
At this time, East West Bancorp has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise East West Bancorp has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.