East West Bancorp, Inc. (EWBC) Earnings Call Transcript & Summary

Well, thanks, everybody, for joining us today. We're excited to have a mid cap bank track kicked off by East West Bancorp. We're pleased to be joined by CEO, Dominic Ng. So thanks very much for joining us today.

Thanks for inviting me here.

So I think we'll start with a few questions. We have a few questions for the audience. And then hopefully, you all have a couple of questions you'd be looking to answer or ask and then we'll continue the conversation. But thanks very much. I think for a while, East West has really been able to outperform guidance on growth as we're moving through the quarter and the year, you're one of the leaders on the growth side. the strength of the capital base as well as the continued client confidence, kept the growth at the top of the peer group. As we enter 2024, the outlook slowed a little bit while growth rates remained high, and you've spoken about having a more balanced approach between C&I, CRE and residential. How does that future growth look different compared to what you've done in the past, historically?

Now I think that from my perspective is that East West Bank is always focusing on having sustainable growth consistently in the long term and making sure that we always perform at the top quartile financially. And we've been always been able to do that. And so I think when it comes to loan growth, deposit growth, it's really coming back down to that means to the end. And we have many different tools to get ourselves into a top-performing banks in a consistent manner. I looked at it in 2024 with the interest rate environment. It's just that probably not too prudent to be in a high-growth position in the loan growth side. And our customers are also pretty savvy. And quite frankly, on the C&I side, while we continue to book many new commitments, there's not much draw down. I think that is one of the reasons why our loan growth has not been as strong as maybe in the past many years. The other part also of it has to do with if you look at in the commercial real estate sector. Obviously, there's not a whole lot of transactions going on right now with interest rate being at this level. So we expect that for the balance of 2024 is not going to give you a high-growth situation here. But relatively speaking, I would say we're probably still doing better than the other peers.

Great. You bring a unique perspective to this conference as one of the longest tenured CEOs, certainly among the mid-cap banks. What's the tone of conversations with clients now versus a year ago? How much do you think higher rates were holding people back from their own book -- their own desire for growth? And are they now more willing to make investments in their businesses?

I think the higher rate, obviously makes it a little bit more challenging from both M&A or making investments, putting the capital to work in terms of building out their business, plus well, the rate tide just makes it a little bit more challenging for people to actually make some of the transaction works. That said, I also looked at it as that for 2024, particularly in the next few months, there's going to be a little bit more of a wait-and-see situation. It is pretty obvious that the Federal Reserve Bank have announced quite transparently that they're going to cut rate. How much? We don't know yet. But I mean, so far, Jerry Powell has been pretty consistent in terms of sending out the signal and doing exactly what he said he's going to do. And I do feel that investors, in particular, many of our savvy clients kind of to looked at the presidential election and we say that, well, at this point, it's hard to tell, let's just wait until the election is over and figure out who's winning, who's losing? And then on top of it, there's going to be an announcement. And from then on, I think people is going to start making their investments accordingly.

Great. To the extent potential credit concerns were causing you to be more selective in growth, has that begun to abate now that you've seen strong performance and rates are starting to -- or indicating to go lower?

And you're talking about the loan?

Just credit, your view on credit potentially of holding that growth earlier on and the performance of credit being strong. Is that an opportunity for catalysts?

I would say that really, when it comes to growing in the future, it's more -- it's a combination. I think the economy world, obviously, have a little bit of a factor because that would affect rate cuts, right? But it all depends because if there are substantial rate cuts, which is much more favorable for doing deals that also must be a signal of a recession. And at that point, it may not be that easy to do deals. So it's really going in into from an economic standpoint, it all depends on why the rates are coming down and to what extent who are the winners, who are the losers. We tend to bank a lot of winners. So therefore, I think that helps. When it comes to credit, I actually looked at what we've seen today is pretty much working out as what we kind of expected in the last few years. What I mean is that I started worrying about a big economy since late 2015. I thought the market was too hot. At that time, we actually -- I mean, having a pretty intense robust credit portfolio review on a monthly basis in all the different C&I loans, in different industry sectors and the CRE loans, et cetera. And not on a single family because we never have losses there. So we've been just doing a lot of intensive review. What we found interesting is that at that time, we identified some of the credits that we classified as maybe large special mention and even some of them substandard. We've done that since then, every single year. And I do feel that helped quite a bit to why we had lower charge-offs, lower NPA and better criticized assets than most of our peers. I think that during that time when we were doing those pretty intense review, and got us into a situation that despite the tariff from 2017 and forward to where it is today, we did not have one trade finance loans, as cross-border trade finance loan that went under, that actually that we have to take a charge off on. And also the fact that during COVID, we didn't really have much of an issue and even before and after. And then as of today, and I look at our C&I loans, yes, it normalized slightly, but still, relatively speaking, is relatively benign. And we expect that to be more or less the same probably going forward in the next year or so. So yes, I'm feeling a little bit more comfortable with the credit situation. But when it comes to growth, I think it really has a lot to do with, one, what the customer will do based on the interest rate environment and based on the economic situation based on who's the President -- and the second part, it has to do with East West, our own execution. And that is for years, many -- so quite a bit of the percentage of growth from East West has to do with our expansion in various industry sectors. So in 2010, '11, we got into entertainment industry. And then later on, we got into private equity to subscription lines and then health care and structured finance, et cetera, et cetera. Those growth help East West to get into a high-growth situation than the other banks. What we are doing right now is that we continue to explore to find opportunities going forward in the next few years. So every few years, East West is going to be able to find some new sector or maybe able to take on some of these industries that we've done well, but expanded even further. And so those are the combinations that we do. And by doing that, we don't have to be subject to the economic condition. What I looked at it is that good time, bad time, we've always done well. That is that because we have always other opportunities out there, other growth engine that we are building but we'll get there. The good news sometimes is like a slow economy or a bad economy is that we actually have more opportunities because we have more capital. We have a stronger balance sheet, and we actually have a much stronger return than everybody else. And from that standpoint, that allow us to be able to capitalize on whatever potential opportunities out there.

You've been speaking about a more balanced approach to growth for the last few quarters, looking at the third -- the 3 buckets of C&I, CRE and residential. How should we be thinking -- what are some of those opportunities to balance that growth? Where should we be thinking the next steps are for East West and getting to that more balanced approach to growth?

Yes. Our balanced approach to growth is really coming back down to we wanted to make sure we do not have any particular area or sectors or industry that we sort have overconcentration. For years, whether it's the Global Financial Crisis in 2008 versus what happened last year with Silicon Valley Bank and then a couple of other banks problem. What you notice is that, by and large, whether it's a liquidity issue or overconcentration in any particular sector, would hurt an organization to go unravel. For East West, we have always had a very balanced portfolio. And the way I look at it is that, currently, when I look at with commercial real estate. We have [ negotiate-ly ] speaking, more or less a full plate because it's like a little bit over 30%. And then I looked at it is that at that level, I'm not sure I want to be out there, keep looking at that CRE assay area that we want to push some high growth. Despite the fact that there are quite a few of what I call distressed situation is very, very attractive, we have taken the position that we are here to help our long-time strong CRE customers. And any time they come in here for a deal, they said, I just found this one particular opportunity that has 60%, 70% discount. And I want to buy it. I said, here we go. We step right up. We've got plenty of room to support the strong existing clients to do what they wanted to do. And frankly, the reason they've been a long time East West customers, I've been to be the CEO for the 32 years now. Some of them being with me for 32 years. The reason they last that long is because they don't make a mistake, right? Those who make mistakes, gone. So because they don't make mistake, they usually are very choosy. So they are not doing much. I expect them to do more, actually, maybe a year, 1.5 years from now. But as of now, they haven't done much. And so we haven't been that busy and CRE actually we do see that in our portfolio kind of shrunk a little. But on C&I, we book a lot of new business, not because the market is strong, not because interest rate is benign, is because there are a lot of opportunity for us to acquire new clients, from customers that were sort of like disappointed with their banks not willing to do what some of the good things they wanted to do. The issue is that, again, these are smart, savvy customers. They don't want to draw down. They said, not yet. I just want to have my commitment here at East West and then whatnot, but they're not doing too much draw now. So -- and that's kind of slowed a little bit. But I expect that we have plenty of room to grow C&I. We will continue in the future, in the next few years, grow C&I portfolio. The single family, we got room and our single-family mortgages, so they hardly have had any losses. We have average loan to value at a very low 50% or so. So we feel pretty good about growing that sector too. So I think that's -- if you look at in 2025 and forward, most likely, you will see C&I and also single-family group will grow a bit faster than our growth in CRE.

Credit has been a focus of investors. I mean, it's always a focus of investors, but it's been an enhanced focus for investors for the last few years. Performance has been very good. Where are you seeing any areas of concern or where are you spending more of your focus on the credit side? And where are there potentially opportunities to take that market share if the other lenders have been backing back or retrenching because of credit concerns?

I think that, again, when I look at going forward in the future, I would expect that for CRE probably maybe a year, 1.5 years from now because the rate drop is not going to be fast enough that really make it that compelling for many of the investors to jump in. But my view is that right now, a lot of the folks that are going for distressed assets are using mostly the cash. But that's not an area that we want to be getting way too excited with. Our position is that we still see that extraordinary opportunity for East West Bank in a cross-border area. We are one of the few banks in the country that actually have a true strong expertise in cross-border business. As I said earlier, even from 2017 all the way to existing that with so much is high tariffs that going on. There's still tremendous import export between U.S. and Asia. And that's not going to change. And maybe different kind of import or export, but it's not going to change. So the greatest news is that so far, we haven't seen many of our peers or competitors are stepping in into the space. So we pretty much are sitting here in a dominant position. More importantly, 6, 7 years ago, we would just have the size of where we are today. So as we grew into like right now, $72 billion or $73 billion. We're now the largest bank headquarter in the state -- Southern California. And with the size, with the name recognition, it just makes it so much easier for us to do business, so much easier for us to recruit better talent, and with over $1 billion after-tax profit and makes it so much easier for us to reinvest into infrastructure. Some of the treasury management, ethics and wealth management, all these other fee income opportunity allow us to be able to put more investment into it to turn it into additional profit going forward. So those are kind of things that we get really excited about.

It's a good segue, I think, to the fee income side of the discussion. You have seen really strong growth in certain areas of fee income. For instance, your FX is significantly bigger than most banks. It's obviously, with your financial base between East and West helping with that. Where else in the fee income side, could you see resources being allocated? And what are some of the goals for broader fee income growth that you have over the next few years?

To that, this is recorded because I was going to not -- I mean I keep lecturing my team about why they couldn't have substantially higher fee income on foreign exchange and treasury management -- treasury fee income and whatnot. But quite frankly, those are areas that we really want to focus on. We are building a better system. On the technology side, infrastructure. And we are recruiting strong expertise, they have a stronger knowledge in this area. And we do feel that there are banks that either understand and know how to explore and take advantage of the space or there are banks who just don't want anything to do with it. We like to be in the business when other banks don't want to have much to do with it because that makes it much easier for us to acquire strong, sustainable, profitable clients. The worst thing is to be in the business when everybody does. Once in a business when everybody does, everyone can do exactly what you do. The only way you can win is cut pricing or maybe take more risk. Now all banks -- most banks would tell you that no, it's different because our people are better. Yes. I mean, I hope that is true that their people are better, but the reality is that usually don't work out that way. So our position is to make sure that we engage and focus on areas that we really have a differentiated capability, which give us a different value proposition, which allow us to be able to build our business in a sustainable and expandable manner, yes.

Great. Maybe let's go to the audience. I'd love to see if there's any questions that the audience has. But first, maybe we'll do our audience response questions and then open it up for Q&A from the audience. So I guess everybody has their devices in front of them. You can respond. The first question, what's your current position in the shares of East West, overweight, market weight, underweight or not involved. Give it about a minute and see. Okay. Let's -- so -- it looks like you have a room for -- a lot of people in the room that are potentially available as investors, 41% not currently involved, 33% overweight, 15% market weight, and only 11% underweight short. So definitely, it feels like there's some opportunity there. The second question. How many basis points in rate cuts do we need to see for commercial loan demand to be impacted by Fed actions? 25 basis points, 50 basis points, 100 basis points or 150 or more? We'll see what the audience thinks here. So it feels like it's still a little later on into 25 before we see a big change. So 80%, 81% at 100 or more basis points, only 18.5% at 50 basis points, nobody at 25. Third question, for East West, where will CD promo rates be by mid-2025. Less than 4%, 4% to 4.5%, 4.5% to 5% or greater than 5%. Okay. So still some room to move lower. So the biggest response, 4% to 4.5%, followed by less than 4%. So there could be some opportunity for pickup on the funding side. And then a final question for the audience. Which would have the most impact on improving East West valuation, above peer loan growth, better relative margin performance, stronger fee growth, better expense control, credit quality out performance, more active share repurchase or an accretive bank acquisition. So we'll do the selection there. Okay. So it looks like between bank -- accretive bank acquisition and a more active share repurchase, capital management is at the top of people's lines, better relative margin performance and credit quality outperformance tied for, call it, second and then growth in fees and loans rounding out. So feels like it follows a little bit of what you've been laying out. So that's a good start. Let's see if there's any audience questions. Please raise your hand. There are some microphones.

So everyone thought that we probably need -- I think it was about 100 basis points of rate cuts to stimulate commercial loan demand. Do you feel like that's accurate? Or do you -- what's your personal view on that?

Yes, I would say that, yes, 100 basis points will be definitely meaningful. That clearly can move the needle. My view is I would pretty much agree with most of you guys indicated, I just don't think that -- well, 50 basis points would be nice, symbolic symbolically, 25 basis point as well whatever. That doesn't mean much. I really feel that, but if they start with 50 basis points, then that send us a good signal. But once you get to 100 basis points, I would absolutely think that there will be quite a bit of movement, assuming the 100 basis points is not because the market has cost a quick 100 basis points yes.

Anyone else?

As you guys get bigger and close to the -- closer to the $100 billion mark, I know you guys have run a tremendously efficient organization. How do you think about investing as you get closer to that point?

Actually, we've been -- always been investing, but we just don't do these sort of like one-time big investment, big announcement and then several years later and then onetime big investment. We don't do that. We just -- every year, gradually, we set aside money to invest different areas, from technology, people and even third-party outsourcing and whatnot. I would say that looking at where we are $73 billion. So clearly, we're actually closer, not that close, but to $100 billion. So you look at California, it's not like there's anybody around that's bigger than us rather than Wells Fargo, which by the way, nobody works in San Francisco anyway, they all live in New York. So that the fact is because we are kind of like the biggest one there, and we pretty much automatically assume that we are -- we're going to be you ourselves like almost like $100 billion because one way or the other, whether we just gradually grow into it or if there's opportunity to come along but we are not getting into it because of an acquisition or whatnot, we're going to get there anyway. So we are pretty much preparing ourselves going in that direction. And I being in the business now, like I said, the CEO of East West Bank for 32 years, when I first took over East West, we were saving and loan, $600 million in assets. And to where we are -- and so been through many different kind of congressional mandate legislation and then whether it's the FDIC to the all way back from [ first link ] to OTS and then FDIC to Federal Reserve Bank, been better than that. And I've always told our team members that if you don't like to be regulated, you don't want to be in this business. We are in a relatively heavy regulated business, but within that confine, I do find that there are plenty of opportunities to do great work. There are actually prime opportunities to make money and the return to our shareholders is actually pretty good. I just went into NASDAQ to ring the bell for our 25th year anniversary to be listed on NASDAQ. Our East West Bank return substantially outperformed the NASDAQ index. So we feel really good about, hey, just because we're a bank. It doesn't mean that we should feel ashamed of can I compete against those dot com company, Internet or right now, AI because most of these folks out there are doing these explosive growth at some point of time, they exploded and disappear. And it would be nice, whenever you have an organization that can just keep pushing up totally gradually is actually not that. But because of that reason, that's why I have so much more respect of investing and growing our organization. Now I don't know what our efficiency ratio would be later on, but what I do focus on really is pretty consistent. That is that East West need to be in the top quartile. So far, we've always in that probably the top 5% or whatnot, compared with our peers in terms of return on equity, return on assets, and it cannot be just looking at one quarter or one year. We got to look at in a 5-year span, 10-year span, and the nice thing about being listed, been 25 years now. When I look at it, we compare with any kind of different angle, we still outperform our peers. And that's all it matters. And that's what we're going to continue to focus in that direction. If that takes substantially more investment and our expenses ratio go up, so be it so long as we, relatively speaking, compared to our peers, we can outperform them. And that's what we've been focusing on.

Makes sense. [ Grant ] back again?

You obviously had tremendous success growing the franchise, and it's been a while since you've done a meaningful acquisition. Sounds like people, for some reason, think you should be doing some kind of accretive M&A transaction. But do you really feel the need to do anything. And if so, what would it be geographically-wise, product-wise, so that's my question.

We've been very active in acquisitions in the, I would say, in the late '90s to late 2000. At that time, it was for a very good reason because there's really nothing that East West does from a sort of like my personal interest of buying banks or anything like that. I just -- I'm a hired gun. I was hired to be the CEO of East West Bank in 1992. Even today, I'm still a hired gun. I mean, institutional investors are our primary investors. So the way I look at it is that what do we do to make sure that East West have a sustainable future that our customers don't have to worry about doing banking with us because one day, we may just suddenly go south. What do I do to make sure that employees feel like that they are investors engaged with the bank. So on all these various reasons, we -- every -- maybe every decade or so, we have to do something different. In the early time of East West Bank, I wanted to convert from a savings and loan to a commercial bank because I didn't think that savings and loan would be a business model that can survive in the long run, right? So I spent all the time doing that. So that's why I didn't do any acquisition other than right at the beginning, I bought some cheap stuff from RTC. That was a good deal. But after that, you buy anything because it wasn't -- we weren't prepared to be able to acquire someone else. But in 1999, I saw this acquisition from 1999 to 2007, it's every year I bought a small bank. Why? Because at that time, in 1999, East West was small. We're about maybe less than a couple of billion. And that small size doing roll up just buying another small community bank roll up. We traded at a higher multiple, buying another smaller bank and then roll it up, take out the expenses, pretty much take out small business, small customers here and there, and that's what we did. Until, obviously, after 2007, 2008, stopped buying because we make sure that watch my own shop, Global Financial Crisis. We got to talk to each and every one of the customers and ask them not to worry about an insured deposit back then, right? And then 2009, FDIC called and then say, "Hey, need you to take over a [ Silicon Valley Bank ]. " So we double the size. And at that point, now it's in a different ball game when we were from $10 billion to $20 billion with the acquisition. And pretty much have all the credit issues taken care of. And at that time, we start getting to an organic growth mode because that was appropriate to get an organic growth mode simply because at that time, we have so much cash flow to allow us to invest in various industry verticals like entertainment, private equity, high tech, biotech, life science, clean tech, and health care and all of these different sectors that we feel for East West to properly build out our capability to resonate better with our cross-border clients, we need to have expertise in all these different industries. And that's what we did. And when we were doing that, we didn't really have time to get into buying another small community bank and all they got is CRE anyway, right? It's not worth doing that. So as we look at where we are today, and I would say that it wasn't like there was -- there weren't a lot of choices out there, and they were not cheap. Today, we can easily get someone newly, really cheap. But whenever we look at the balance sheet is that what's in it for us? We already have some pretty good CRE. Do I need more CRE? Probably not. Then do I need to have more consolidation to puts my efficiency ratio down to from 30-something to 29, probably not. So it's really looking at what is the better way for us to grow organically. So the conclusion was that we really had a hard time to find some of the smaller banks that we can take it over, that they can actually add much value to us. So now granted, have we not have any growth at all, if we were at like 1% or negative growth in terms of loans and deposits, hey, maybe some of those not-too-attractive kind of acquisition still look attractive. But quite frankly, we don't have to do that because we were able to grow organically. So far, we still even in this very tough interest rate environment, we're still growing. So as long as we continue to have that, we probably would have a hard time to find a strategically meaningful acquisition. That's not to say that I'm not interested to acquire a bank. I mean I started my career in actually doing a lot of M&A work. So therefore, that is something that I'm very comfortable to do. It's just that we have not yet been able to find something that were attractive.

On that topic, how should we then think about capital management from here? You're continuing to grow capital. You're saying now you're not in the business of warehousing capital with less opportunity for M&A. Should we be thinking of the buyback as a more aggressive tool that you're going to be utilizing going forward?

It depends because we have always run East West Bank with robust capital. And the way that we look at it is that it's a premium to do business when we actually have the ability to tell a prospect or even existing clients that hey, I'll look at East West Bank capital ratio. Well, higher than all our peers or at least maybe -- we're at the 95% of all our peers and then we compare to large banks. We're substantially higher than them. Once we put out this capital ratio, it gives customers so much ease. And if I looked at last year -- I mean, March last year, on March 9, all the way until March 16, I had to make a -- place a lot -- have a lot of phone calls because it's not just Silicon Valley Bank and then next thing happen to other banks who are coming down. And customers have concerns. But my simple answer to them is look at my capital ratio, look at how much -- I said, first of all, look at how much money we made and then you look at how much capital I have. If things go haywire, if I have to really pay up for additional deposits or if I have to string the balance sheet down, I still have so much sort of like profit that can sustain losses. In addition, to have my capital ratio is so much higher. I have so much more cushion and that immediately calm our customers down. That's why our deposit moves like maybe 1% or something. And then when I look at in the industry. Wow, there's a lot of ups and downs in deposits. And this is something that this high capital ratio buy so much more confidence from our customers and from our own employees, too. There's one thing about me telling the customer, but with [ our 5 ], I have 550,000 customers, or maybe today, I think even higher. I need somebody else to relay the message and our employees need to feel confident that we have the ability to sustain. So that is a given. And I would say that going forward, you'll always see East West in that position. And that's why I want to make sure we also perform the highest quartile. The idea is that no investor is going to like me talking about, well, I need more capital, I need more capital when our performance in terms of return on equity and return on assets sucks, right? Because anybody is going to look at it is say, yes, you have high return, but you perform in the bottom quarter -- quartile. That's not good, right? So now the in the top and also at the highest capital on the top and then everyone else gives you some room to do what you do. And that's what we've been doing. Now that doesn't mean that we are also silly enough and not make some of these repurchase at the appropriate time. So we've done that, and we'll continue to do it. And -- but we will always be somewhat opportunistic, a little bit more selective. So every now and then, we may not be buying h because we think that, well, maybe there are opportunities we can buy something even at a better time. So it all varies. But I would say more or less, you can always count on that our capital ratio, is always going to be at the top level. Just like our way of pushing our team to make sure that our return on equity is always in the top quartile, and that's what we're going to be.

Great. Well, thank you very much. We're at the end of our time. Western Alliance will be in the room in 5 minutes, but please give a round of applause to Dominic and East West, and thanks very much.

Thank you.