East West Bank Faces Margin Squeeze, But Investors Like Plan

East West Bancorp is planning for the impact that lower interest rates will have on its asset-sensitive balance sheet, and Wall Street is betting that the bank’s preparations will be enough to propel it to the other side of the headwinds.

The Pasadena, California-based company is dealing with the classic interest margin problem net of a lag in the revaluation of its loan yields and deposit pricing.

Still, analysts were upbeat about the bank’s prospects after it beat expectations in third-quarter results announced on Tuesday. The $74 billion-asset bank’s share price rose 7.1% on Wednesday, trading at $96.80 at 1:30 p.m. ET.

East West reported third-quarter earnings per share of $2.16, above analysts’ consensus estimates of $2.07.

East West, which focuses on the Asian-American banking market, increased its total deposits by 12% year-on-year to $61.7 billion, helped by a major New Year’s certificates of deposit campaign Lunar earlier this year. CD deposits represented about 38% of total deposits at the end of the third quarter.

Chief Financial Officer Christopher Del Moral-Niles said on the company’s earnings call that the bank has seen solid retention of these deposits, even as it has reduced the CD price by 100 basis points since the first quarter – double the 50 basis point. Federal Reserve basis points. cut so far.

Constant reassessment “will continue to be positive,” the CFO said. “Our timing was: bring them in early, move down the curve as the Fed moves, and that seems to be working in our favor right now.”

Still, the bank’s high cost of deposits reduced its net interest margin, which was 3.24% in the third quarter, compared to 3.48% in the third quarter of 2023.

Although East-West is paying less interest to people who deposit their money at the bank, weak loan growth is leaving it to rely on its bond portfolio to support net interest income.

Loan growth has been “slower than we wanted”, according to Del Moral-Niles. Rising income from both the bank’s loans and securities portfolio helped deliver net interest income that was roughly flat year-on-year at $573 million – well above analysts’ consensus estimate of $560.4 million. dollars.

Due to adverse trends in loan growth and deposit costs in 2024, the bank forecasts a 3% to 4% annual decline in net interest income.

If the Fed continues to cut rates, as expected, it will affect the revenues East-West collects from loans, although balance sheet growth could offset some of the impact.

East West executives warned Wednesday that if the Fed quickly cuts rates, the bank’s asset yield will feel more pressure.

Chairman and CEO Dominic Ng said on the earnings call that the bank’s capital level – its Common Equity Tier 1 ratio was 14.1% at the end of the third quarter – gives the bank flexibility whether demand for loans increases rapidly or more slowly.

Truist Securities analyst Brandon King wrote in a note that East West’s robust capital levels and long-term growth prospects make the stock “very attractive” despite lower near-term revenues.

Citigroup analyst Ben Gerlinger wrote in a note that East West has a well-managed expense base, continued opportunities to earn fee income — which totaled a record $81 million in the third quarter, a 21% increase in compared to the previous year – and future net interest. income tailwinds.

He wrote that East West is “a high-quality regional bank with a strong management team that is well positioned for a higher-rate environment for longer, given its healthy capital ratios and lower credit risk than peer banks”.

Ng said on the earnings call that the bank’s fee income growth should be sustainable, highlighting its efforts to boost cash management and treasury management services.