Morgan Stanley’s Best Overweight & Quality Stocks: Top 25 Stocks

12. East West Bancorp, Inc. (NASDAQ:EWBC)

Number of Hedge Fund Holders In Q2 2024: 27

Average Analyst EPS % Revision: 0.5%

East West Bancorp, Inc. (NASDAQ:EWBC) is a regional bank that is primarily a mega lender. This is because as of H1 2024, 84% of the bank’s interest and dividend income came through loans receivable. As a result, East West Bancorp, Inc. (NASDAQ:EWBC) shares are particularly sensitive to interest rates. For instance, during the bank’s fiscal Q2, its 49% profit margin dropped by 6 percentage points over the year ago quarter’s 55%. This also drove net income down 7.6% to $288 million. Consequently, post earnings, the stock dipped by 12.6% over the next couple of days. Looking at East West Bancorp, Inc. (NASDAQ:EWBC) loan portfolio, $37 billion out of $52 billion of loans are made to the commercial sector. While these loans are typically more robust when facing inflationary pressure, out of the $37 billion, $20 billion are in commercial real estate. As a result, East West Bancorp, Inc. (NASDAQ:EWBC) is vulnerable to economic downturns that could increase defaults. Additionally, high interest costs have also constrained the bank’s ability to make new loans, and when management disclosed this in September, East West Bancorp, Inc. (NASDAQ:EWBC)’s shares dropped by 6% over the next week.

During the Q2 2024 earnings call, East West Bancorp, Inc. (NASDAQ:EWBC)’s management provided important details about its commercial real estate portfolio:

“With regards to commercial real estate loan maturities, as of June 30, 2024, 5% of outstanding balances are scheduled to mature by the end of 2024 and 10% of outstanding balances will mature in 2025. For office loans specifically, 8% of outstanding balances will mature in 2024 and 16% will mature in 2025. We remain vigilant and proactive in managing our credit risk. Based on what we know today we continue to expect quarterly net charge-offs to be in the range of 15 basis points to 25 basis points for the foreseeable future.

Turning to Slide 9, the total allowance for loan losses increased $14 million quarter-over-quarter, driven by the expected economic outlook and also loan growth during the quarter, resulting in allowance for loan losses coverage ratio of 1.30%. Within commercial real estate, we increased the reserve for office loans by $7 million, bringing the total coverage ratio to 3.10% of office loans. We believe our loan portfolio is appropriately reserved as of June 30, 2024.”