East West Bancorp, Inc. (NASDAQ:EWBC) Q4 2023 Earnings Call Transcript

East West Bancorp, Inc. (NASDAQ:EWBC) Q4 2023 Earnings Call Transcript January 23, 2024

East West Bancorp, Inc. beats earnings expectations. Reported EPS is $2.04, expectations were $1.89. EWBC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the East West Bancorp’s Fourth Quarter and Full Year 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Adrienne Atkinson, Director of Investor Relations. Please go ahead.

Adrienne Atkinson: Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review East West Bancorp’s fourth quarter and full year 2023 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer; Christopher Del Moral-Niles, Chief Financial Officer; and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our Investor Relations website. The slide deck referenced during this call is available on our Investor Relations site. Management may make projections or other forward-looking statements, which may differ materially from the actual results due to a number of risks and uncertainties. Management may discuss non-GAAP financial measures. For a more detailed description of the risk factors and the reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8-K filed today.

I will now turn the call over to Dominic.

Dominic Ng: Thank you, Adrienne. Good afternoon, and thank you everyone for joining us for our year-end earnings call. 2023 was another record breaking year for East West. Our highlights include new record levels for revenue, net interest income, net income, loans and deposits. Our 2023 results speak to the resilience of our business model, the loyalty of our customers, and the persistence of our bankers. Despite the turbulence in the early half of the year, we grew customer deposits by $1 billion in each of the past two quarters. We did this by adding 40,000 new deposit accounts over the past year, both consumer and commercial, and driving a more granular deposit base. Our loan growth was driven by our differentiated residential mortgage product and the strength of our commercial lending relationships.

Asset quality remains strong and we continue to proactively manage our credit risk. Our 2023 annual net charge-offs to average loans were just 9 basis points and our non-performing assets to total asset ratio was just 16 basis point at year-end. We continue to deliver industry-leading efficiency, supported by our simple, proven business model and effective branch network. Our efforts drove a 20% adjusted return on average tangible common equity and a 1.7% return on average assets in 2023. Looking forward, we remain focused on driving core deposit growth, and we are pleased by the early progress on continued net new customers and balances as we begin 2024. We have started the New Year from a position of strength. Given our earnings stability, solid credit performance and strong capital levels, I am pleased to announce that our Board of Directors has approved a 15% increase to the quarterly common stock dividend to $0.55 per share.

I will now turn the call over to Chris to provide more details on our fourth quarter financial performance. Chris?

Christopher Del Moral-Niles: Thank you, Dominic. Our fourth quarter 2023 net income was $239 million. Excluding the one-time FDIC charge and securities gains, our Q4 adjusted EPS was $2.02. Turning to loans on Slide 4, East West grew total average loans by 9% for the year, reflecting the strength and scale of our core residential mortgage and commercial real estate platforms. We note that over the last five years, East West has grown loans at a very healthy 10% compounded annual growth rate. Demand for residential mortgage remained quite strong. Despite the generally rising rate environment, we originated $3.5 billion of low risk, low LTV mortgages in 2023. And while we expect growth to moderate from Q4’s trend, our pipelines remain resilient going into the first quarter of ’24.

Average CRE balances grew in ’23 as we continued to work with longstanding relationship clients. We saw solid increases in both multifamily and industrial property lending, while office loans declined. Looking at the Q4 end-of-period balances, our fourth quarter growth was driven by an uptick in C&I utilization and continued solid residential mortgage originations. Looking forward, assuming the economy moderates into a soft landing, we expect overall loan demand to moderate as well. We expect our growth will continue to be driven by strong residential mortgage activity and continued growth in C&I lending, leading to a further and better diversified loan portfolio. Moving on to deposits, we note that over the last five years, East West has grown deposits faster than loans overall.

Despite volatility in the first half of ’23, East West continued to grow average deposits year-over-year. We continued to show deposit momentum in the fourth quarter by adding another $1 billion in deposit balances. Our growth reflects the focus and dedication of our bankers and the loyalty and resilience of our broad based customers. Looking forward, we will continue to focus on adding granular low cost consumer and business deposits, while continuing to reduce our use of non-core brokerage or wholesale funding. Turning to net interest income and margin on Slide 6, Q4 dollar net interest income increased by 1% to $575 million from the third quarter. We held our net interest margin stable at 3.48%. While our $4.25 billion of cash flow hedges continued to be a net drag on NII in Q4, on a mark to market basis, some of these forward-looking hedges are now in the money and expected rate cuts will only make that better.

While these hedges cost us approximately $25 million of NII in the fourth quarter, they’re expected to provide valuable earnings protection as rates decline. Given the current forward curve and consensus economic outlook, we expect NIM to decline by 3 to 5 basis points in Q1, as deposit costs continue to normalize and new asset yields continue to flatten out. We then expect our margin to be further compressed in Q2 and Q3 as a result of the expected rates moving lower. NIM likely troughed in Q3 and we expect this to begin to rebound thereafter as assets grow, expected lower funding costs kick in, and the expected positive cash flow benefits from our balance sheet hedges begin to offset lower asset yields. Speaking of asset yields, let’s turn to Slide 7.

Our expectation for margin resilience is also supported by the enhanced levels of fixed rate assets in our portfolio at year end. Fixed rate and hybrid loans in a fixed period represented 42% of our loan portfolio at year-end ’23 versus 35% at the beginning of 2022. Turning to funding costs on Slide 8, our average cost of deposits for the fourth quarter was 260 basis points, up 17 basis points from the third quarter. As Dominic previously mentioned, we remain laser-focused on driving core deposit growth and growing net new customers and balances as we begin 2024. Looking forward, we are optimistic about our operational ability to rapidly reprice non time deposits in a falling rate environment. Moving on to fees and noninterest income, East West has grown fee income at a 10% annual rate over the past five years.

2023 fee income growth reflect the continuing strength in our customer derivative business, lending fees and foreign exchange income. We note that Q4 saw growth in every fee categories. Moving on to Slide 10, total annual adjusted noninterest expense trends are on the left. Adjusted noninterest expense has grown 7% annually over the past four years, compared with our 11% annual revenue growth. East West consistently delivers industry-leading efficiency. The fourth quarter adjusted efficiency ratio was 33.1% compared with 31.2% in the prior quarter. Adjusted noninterest expense was $215 million in the fourth quarter. Comp and benefits did increase $8 million, reflecting higher commissions and incentive growth. And other operating expenses did increase $6 million, reflecting some increased legal expense, realized credit card fraud losses and some advertising expense.

Looking forward, we expect adjusted noninterest expense to increase in the range of 6% to 8% year-over-year, driven primarily by comp and benefits and partially offset by lower deposit account expense, as earnings credit and related rate driven expense pressure begins to ease in the lower rate environment. I will now turn the call over to Irene for discussion of our asset quality and capital position. Irene?

Irene Oh: Thank you, Chris, and good afternoon to all on the call. As you can see on Slide 11, the asset quality of our portfolio remains broadly stable. During the fourth quarter, we recorded net charge-offs of $20 million or 15 basis points, a 1 basis point increase from the third quarter. Quarter-over-quarter, non-performing assets as of December 31 increased modestly by 1 basis point to 16 basis points of total assets. The criticized loan ratio decreased 14 basis point from September 30 to 1.87 of loans held for investment. The special mention loans ratio decreased 18 basis points quarter-over-quarter to 77 basis points of total loans held for investment as of December 31, and the classified loans ratio increased 4 basis points to 1.10% as credit continued to normalize.

We remain vigilant and proactive in managing our credit risks. We recorded a provision for credit losses of $37 million in the fourth quarter compared with $42 million for the third quarter. Turning to Slide 12, the allowance for loan losses increased $13 million quarter-over-quarter, primarily reflecting net loan growth. The allowance for C&I loans increased $9 million. The allowance for commercial real estate loans increased $4 million. And the allowance for resi, mortgage and consumer remained unchanged from the prior quarter. The reserve for office loans increased by $2 million to 243 basis points of total office loans. We believe we are adequately reserved for the content of our loan portfolio given the current economic outlook. Turning to Slide 13, as shown on this slide, all of our capital ratios expanded quarter-over-quarter due to the strength of our earnings.

East West’s CET1 capital ratio stands at a robust 13.3%, while the tangible common equity ratio grew 34 basis points to 9.37%. These capital levels place us among the most well-capitalized banks in the industry. East West Board of Directors has declared first quarter 2024 dividends for the company’s common stock resulting in a 15% increase in the dividend. The quarterly common stock dividend of $0.55 per share will be payable on February 15, 2024 to stockholders of record on February 2, 2024. East West repurchased 1.5 million shares of common stock during the fourth quarter of 2023 for $82 million. We currently have $172 million of repurchase authorization that remains available for future buybacks. I’ll now turn it over to Chris to share our outlook for the 2024 full year.

Christopher Del Moral-Niles: Thank you, Irene. To summarize, as stated on Slide 14, our full year 2024 outlook assumes a softening economy with a more modest growth profile in ’23 and takes into consideration the year-end forward curve with cuts assumed to begin in the second quarter. We expect end-of-period loan growth in this environment to be in the range of 3% to 5%, driven by moderating demand, but buoyed by relative strength in our residential mortgage and C&I lending activity. We expect net interest income to decline in the range of 4% to 6%, driven by the expected rate cuts. Adjusted noninterest expense is expected to increase in a range of 6% to 8%, driven again primarily by comp and benefits and partially offset by lower deposit related expenses.

First quarter net charge-off levels are expected to be in-line with the fourth quarter of ’23, with subsequent quarters increasing modestly as we expect full year net charge-offs will fall within the range of 15 to 25 basis points. We expect our effective tax rate will increase modestly for the full year. With that recap, now let me turn the call back to Dominic for his closing remarks.

Dominic Ng: Thank you, Chris. Let’s go to Slide 15. As I look back, I’m very proud of our strong performance in 2023, marked by 18% growth in tangible book value per share year-over-year, and by recognition from S&P Global, Forbes and Bank Director as a top performing American bank. I also would like to thank our associates for their unwavering dedication to our clients. As Chris mentioned, economists are projecting a softening economy and a declining rate environment in 2024, but at East West, our goals remain the same, which are to help our commercial clients thrive to meet the savings and investment needs of our branch customers and to operate with strong capital and prudent risk management, allowing us to deliver top-tier returns to our shareholders in any environment. I will now open the call to questions. Operator?

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ebrahim H. Poonawala with Bank of America. Please go ahead.

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Q&A Session

Ebrahim H. Poonawala: Thank you, and good afternoon.

Dominic Ng: Hey, Ebrahim, good afternoon.

Ebrahim H. Poonawala: Hey, Dominic. I guess maybe first question for Chris, just around the NII outlook and the sensitivity to the rate cuts. So, it seems like the down 4% to 6% assumes the six rate cuts that were there in the forward curve. Give us a sense of what if we get zero rate cuts or just get three rate cuts, should we assume proportionately NII holds up a lot better? And if we don’t get rate cuts through until maybe even May, are you doing — taking further actions to kind of neutralizing the balance sheet?

Christopher Del Moral-Niles: Yes, yes and yes. So, yes, if there are not as many rate cuts as we projected at year-end, NII will do better. Yes, if rate cuts start later, NII will do better. And yes, we are proactively taking a number of steps to make sure we manage our sensitivity to rates. But in particular, our focus on deposits is one that we think will yield us some benefit as we move through the course of the year.

Ebrahim H. Poonawala: Noted. And I guess maybe another question, Dominic, for you. So, you managed through last year, very strong results, you have solid capital levels. It feels like there’s fair amount of disruption just across the banking sector maybe in terms of people moving, loan portfolios, maybe banks up for sale. Just give us a sense in terms of when you’re looking at 2024, how do you see the opportunity set in terms of actually putting investment dollars to work and capitalizing on the disruption out there?

Dominic Ng: Well, we actually continue to look into the market and see — to a certain extent, obviously, we all saw what happened last year that a lot of our larger peers, well, two of them were gone and then some of the other peers are having some financial difficulty or transitioning and whatnot. And so, from a competitive landscape, I think it is marginally better for East West Bank, but we have always been prudent and the reason we didn’t get into trouble is because we don’t try to go all out in any one particular direction. We’re always trying to look at making sure that we have a diversified portfolio. So, in terms of recruiting talent and so forth, we are very selective. We’re trying to make sure that there are talents out there that have the right mindset that fit into the East West culture and also they are in the kind of like business that fit into our sweet spot and then we will bring them over, and we’ll continue to be out there recruiting and looking for the right talents to join us and together with our own associate who continue to grow.

And so, we feel that 2024, we cannot predict exactly what the economy is going to be like, but we do know what East West can do, which is that our team will find a way to continue to bring new customers and we’ll be able to continue to help support our existing customers. And with that, we’ll be able to grow deposit, and we’ll be able to grow loans, and also have meaningful fee — diversified fee income. And that’s the plan.

Ebrahim H. Poonawala: Got it. I’ll re-queue. Thank you.

Operator: The next question comes from Ben Gerlinger with Citi. Please go ahead.

Ben Gerlinger: Good afternoon.

Dominic Ng: Good afternoon, Ben.

Ben Gerlinger: [Technical Difficulty]

Christopher Del Moral-Niles: So, Ben, I think we missed a good portion of your question, but I think your question was broadly around deposit betas and how do we think deposit betas unfold? And so, I think there’s a couple of thoughts here. The first part is we had a reasonable uptick in deposit beta as rates rose, we would expect to have a reasonable downtick in deposit pricing as rates fall. Specifically, we are expecting our deposit beta to be north of 0.5 on the downtick. And I think that is a 0.5 that we recognize we could be more aggressive on, particularly if rate cuts come sooner or faster. And we would note that we think there is upside to that level if we can get our arms around the pace of cuts that we expect. And I think that will be Fed path dependent, but I think we’re very comfortable that there’s upside to that if we can get some clarity on that as we move through the course of the year.

Ben Gerlinger: Got it. That’s helpful.

Operator: Mr. Gerlinger, if you could pick up a handset perhaps if you’re on the speakerphone by any chance?

Ben Gerlinger: [Technical Difficulty]

Christopher Del Moral-Niles: We continue to see 2024 as the year for continued investment in our core businesses and platforms. And so, while we recognize that up 6% maybe a higher number than you’ve heard from some others, we would also suggest that a 33% efficiency ratio is a much better start point than you have from many others. And we think that’s the right decision to make for the long-term strength of East West franchise.

Ben Gerlinger: Got you.

Christopher Del Moral-Niles: We would also note that 6% growth off of 33% efficiency is a lot lower than 6% growth, say, off of a 65%, just for conversations.

Operator: Okay. The next question comes from Dave Rochester with Compass Point. Please go ahead.

Dave Rochester: Hey, good afternoon, guys. On your NII guide, what are you guys assuming for deposit growth in that? And what are you baking in for the BTFP maturity that’s coming up? And if you can just give like a rough estimate, what are you seeing in terms of what a single cut means from a margin or NII impact at this point, just given the assumptions that you talked about on deposit betas?