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

Yes, sir. We'll go ahead and get started. So next up, I'm delighted to welcome Dominic Ng, Chairman and CEO, East West. So Dominic does this once in 5 years. So we are lucky to have Dominic join us.

But maybe just to start things out, obviously, East West, I think it's known for being a bank that's been -- has done extremely well in terms of growth in a calibrated way, but above average growth. When we think about just the macro cross currents, talk to us in terms of your outlook for the bank today versus a year ago, are you more optimistic on the growth outlook? And how are your customers feeling about things still?

Well, I definitely will feel a little more optimistic than 12 months ago. And -- but for us, I think that you can't just count on the macroeconomic condition. And then whenever we feel things are great, sometimes things don't turn out to be that great ultimately still coming back down to our internal execution. And what we've been focusing on for years is that East West Bank has always been a relationship-driven organization. We'll bring one customer at a time. And when we earn their business, we want to make sure we take care of them so that the retention rate is high. So as long as we keep doing that, everything is relative in banking because we are competing against all the other banks. If you can do better than them, you are better, and that's all to come down to it. So we've done well in great economic environment, we've always done even better in a more challenging economic environment because ultimately, all you have to do is do better than the other. It's like a bear chase. We always run faster than the other guy. So we don't get killed.

Got it. So I guess, as you think about the customer base today, that means there's some concern that rates -- the Fed might be done for the year in terms of rate cuts. Does that have any negative implications as you think through your 3 sort of C&I, CRE, residential mortgage buckets? Like do the lack of rate cuts or a bit of a steepening in the curve? Do you worry about that in terms of what it could mean for credit quality, the health of your customers?

Yes. I think the -- if there's not going to be another rate cut or maybe the steepening of yield curve that probably will have a negative impact more so for CRE. And I still think that it will investment opportunity, which indirectly would affect C&I business growth, and that would not be positive. But on the other hand, the dynamic is that if it gets worse, and I'm pretty sure with a very, very active President like what we have today, he's going to make all kinds of move, right? Because right now, the environment is such that even though rate is not dropping much, the market reacts positively because people feel that, hey, as long as it cannot -- economy is going to grow substantially stronger. As long as a business are going to get a higher revenue growth, they are totally okay with a high interest rate to pay more interest expense because the revenues grow even at a higher pace. That's all that matters, right? That's how people feel. But if for some reason, the rate is such that cost business not be able to generate additional business all the interest expenses stay high, then I think that indirectly, it would affect business and then the market. And I'm pretty sure when the market starts going south, perhaps we will react, we react very, very strongly. And then at that point, we'll see what happen.

Within that, so when we think about this, even in the last week around tariffs and all the macro headlines, when we think about your growth outlook and you mentioned growing beyond macro. Just talk to us how -- now that we are maybe a month or 2 in the new year since the new administration a few weeks into it. Are we beginning to see a pickup in lending demand? Are you seeing customers actually act? Or are they still in wait and watch mode.

Not quite because even with the enthusiastic or excitement on all these so-called new plan that our new administration have sort of talked about it. I think in general, it would take months to get going. It will take months to get going. So I would say that in general, I don't expect January was going to -- I mean, our January is not a great month, but it's tradition, it's always never been that great of month, and then on top of it with the Southern California wildfire people are a little bit distracted. I don't think that maybe the first quarter will be a good test. Right now, I'm expecting things are going to start picking up maybe the second quarter and then so on, probably second half of the year will become stronger. If the Trump administration policy moving forward in a positive way, then I expect that the economy should be stronger, and then people should have more confidence to invest. And therefore, there will be more demand for banks like us. When it comes to tariffs, how I looked at it is that we at East West Bank dealt with tariffs for 8 years now, whether it's the Trump administration and the Biden administration, tariffs after tariff. And our clients that actually are in the cross border business also have dealt with it, and they navigate it just fine. We actually sustain no losses. And we're doing actually the last 8 years when I look back, we have a 10% growth in compounded annual growth rate and loans, 10% growth in deposit year after year. So on that standpoint, it's not bad. So we know exactly how to navigate it, which is quite different than I would say that the vast majority of the banks here that they always look at it is at tariff doesn't have anything to do with us because we don't have anything to do with Asia or China, where, in fact, a vast majority of the import coming to the United States are from that -- those regions. So I think that tariffs are affecting them without them knowing about it. But with us, since we know so much about it, we know exactly how to navigate. So I'm not too concerned about the additional tariffs that are coming in because, quite frankly, most of our clients are well prepared for it.

And maybe let's talk about your guidance. I think loan growth about 6% for the year. What's...

4% to 6%.

4% to 6%. I mean I have a high bar for you. So I think -- but 4% to 6% loan growth then you think about the 3 loan buckets, just give us a sense of within C&I, are there certain markets or lending verticals that's driving that growth?

Yes. I think on the C&I side, we'll expect that in general, in most of the areas that we've been involved with from entertainment, private equity and renewable energy stuff, well, despite the fact that I think the current administration don't care much about it. There are projects, I mean, it's already sort of like in motion. We expect that to be happening. And we expect quite a few of these and various other industries, C&I and in the digital media space, we expect growth from all of those areas. And then so we are somewhat confident that we should be able to get some meaningful growth there. And our residential mortgages is always the star. And year in, year out, we always get the kind of growth coming from that segment. And in addition, right now in Southern California, there is high demand for mortgages because when you have -- I mean, unfortunately, that many homes get burned down, there are a lot more people out there looking to buy homes actually and then also getting new mortgages. So from that standpoint, we feel pretty good about -- there will be demand there. And CRE is -- I think East West Bank, we internally -- intentional try not to grow as much as to make sure that we stay way below that CRE concentration percentage limit, right? So -- and that is an internal decision, demands out there but we just internally decided that we don't want to have too much growth there because the regulator look at CRE in a very different sense, not necessarily 100% based on there are substantial higher credit risk. And it's just that CRE somehow is just not looked upon as a decent asset. But we have to respect that. So therefore, we are just balancing in between.

And does that mean CRE balance has stayed relatively stable here? Or do you see enough in the...

We still expect growth from it. But it's just a much smaller -- it's a smaller percentage growth than the other two, yes.

And also talk a little bit from a C&I perspective. A few years ago, we would talk about Chicago and New York, we're still underpenetrated as far East West is concerned. From a geography standpoint, has -- like are there certain markets that are of particular interest, be your hiring where you see an opportunity to grow?

We -- yes, we are still growing in Chicago, and we -- our office in Atlanta, I think we're also picking up some growth. And obviously, both Dallas and Houston. These are areas that we don't have the kind of concentration of exposure. Unlike Southern California, we've been the largest bank headquartered in Southern California, so that we have great presence. To a certain degree, it's so much easier to grow in Southern California because our names everywhere. You go watch Lakers' game and you East West Bank names all over the place, right? We do banking with the ramps. We do banking with Clippers. We do banking with the Lakers, what else is left by except ice hockey. I'm not going to get that soon. So from that standpoint, I think that because we are kind of a powerhouse in L.A., so it makes it easy because the brand is so strong. While folks in Chicago for folks in Atlanta jumping out to Charlotte to get business that kind of way is harder. But while it's harder, we encourage them to continue to build up that business. so that we would have a much more diversified growth down the road.

I guess, maybe sticking to California. I mean, we obviously had a couple of California banks get into trouble in 2023. Has that -- I mean it feels like East West traffic in some of those businesses where there might be opportunities. Just has that created either client acquisition or talent acquisition opportunity for the bank?

We have both, but not that much. Not as much as people expected. Some people would think that Wells Fargo was the biggest. We didn't do any much for the last few years and then everybody moves to the East Coast. And then you have the second and third largest, which is First Republic and Silicon Valley with the fourth, right? And when they left, obviously, you would expect that the business all flowing down to us, but we didn't get much because there are a few different reasons. One, both of them tend to do much, much, much bigger loans. And the East West, we're not that much smaller. We just fundamentally don't like to have over concentration risk on this one customer, too, and that kind of thing. But then that's business as usual for us is a wow, that's exceptionally big when you do $100 million, $200 million, $300 million size kind of deals. And that's not something that we are very comfortable with. That's one. The second thing is that, I think First Republic in general, very customer-friendly when it comes to pricing. And it's so customer-centric, that is not a win-win for me. I look at it, it says, you got to be -- when I look at these kind of prices, you've got to be kidding, right? I mean, this is not -- I mean, the reason that why there was so-called so mistreated by JPMorgan is because these customers are getting back to reality, right? But there's no way for me to take it on when the pricing is so far apart. And I looked at it, so even if I take it on, I'm not sure I can maintain and sustain that relationship for long. If someone is so used to being treated so badly without paying, right? And then you have Silicon Valley Bank. There's a lot of those different nuances, which is they oftentimes get the business but get the banking business like loans and deposits because they invest in the funds. So I don't like the idea about, well, we will replace Silicon Valley Bank for me putting in $5 million, $10 million of equity to invest in the funds. And then I got all these volatile fee income or capital gain, right? And this is not the kind of model that I'm too excited with. So I would say these are the 3 reasons that make them to be less likely to fill in to our profile. And then -- but we continue to find a way to grow. Occasionally, there's always some customers that will come to us that still fit into our pricing model and also still not coming to us and asking for us to step up in terms of making equity investments. Those customers come to us.

Got it. That's helpful. And maybe there is part of the change in administration is also this expectation that we may get back to a bit more of a balanced regulatory backdrop. Talk to us as you think about from a regulation like you mentioned, first, second and third bank, the fourth bank, which you moved up in terms of the love you're getting from the regulators, I guess. But what does this mean from a regulatory or supervisory perspective, what could change that would make life easier for you?

Well, we have a lot of tender love and care from the regulators. So there are a massive number of regulators in our office quite frequently because they are available, they are available, right? But on the other hand, I think what I envision in this new administration when they said, shut this down, shut that down. And I would imagine that there will be new regulations that we're planning that may not be implemented and that may even be some existing regulation that may be sort of losing a little bit. From our perspective, any time there are less regulatory burden that's always helpful because then we don't have to spend that much time to submitting the report here and report there. It's always helpful. So we feel that this is by and large, hopefully, it will be better for East West Bank and the whole banking industry. I mean the key is that -- I mean, it's too early for me to tell right now what exactly it would -- what exactly a specific regulation that will be eliminated or not? And that -- once I see a clear picture maybe 6 to 9 months from now, then I have a better idea about how would that affect the safety and soundness of banking industry going forward in the next several years? Because we saw deregulations, it's only like 20 years ago, that deregulation cause eventually, the global financial crisis, right, that can hurt not only the United States, the world quite drastically. But if I look at it from an East West perspective, either way, I am going to be fine because we did extraordinarily well at the global financial crisis. So I looked at it, if things turn out to be too loose and then a lot of banks out there taking a little bit sort of like unsafe and unsound practice. My view is that we just have to be patient and hanging there and make sure that at some point, we'll be able to be ready and available to take the leadership to support FDIC.

Is that why you're building the capital, so you're ready to...

Well, there's always that just in case, right? I will tell you, we have a very -- I mean, my 32 almost 33 years now at East West Bank as a CEO, we have consistently outperformed our peer banks, right? You can look at it from a 1-year standpoint, 3 years stand point, 5 years stand point, 10 years, 20 years, 30 years, we always outperform. But the best of times have always been a crisis situation. In 1991 and '92, it was a savings and loan crisis. As I was able to buy SNL and then double the size and triple the profit and then even convert to a commercial bank and now become a full-fledged international commercial bank, right? And you look at Amazon Home Savings, Great Western and then turned to [ Wahoo ] they all eventually fell, right? But we were able to do that because we came in always hitting in the right spot at the right time because we prepare for it. And because when I first became CEO, we made sure that we have capital to execute and also the right timing and also regulatory in a safe and sound manner so that we're eligible, right? In 1998, it was the Asian financial crisis. So we did the management buyout and then went public and then basically just took off in terms of our financial performance. And then in 2000, the dotcom meltdown, we were actually in great shape to take on more customers when there are technology companies all falling apart. 2001, 9/11, we have a lot of hotel customers who have no customers. With our capital ratio, with our strong balance sheet with our low NPA I was able to tell these customers. I said, just hang in there. Don't worry. I'm not going to come foreclose on you, just hang in there, right? And these are the customers today, they are now billionaire, and every time there's a hotel loan, they said, you guys want to look at it. If you don't want, I can go to somebody else, but you get the first right. And then that kind of loyalty build is really critical. And the same thing for 2008. And when I hope some of the customers they carry through past 2009, now they are sort of like big time business folks. And they're always the one that say, you get it first. And I always looked at it is that it's always the crisis are the perfect moment for us to substantially build strength and build loyalty. And that's why, to a certain extent, I don't want to wish the economy with demise, but on the other hand, it worked out really well for us because of the strong capital, the strong balance sheet. And then the tremendous profitability that we have. Because if you just have a lot of capital, if you have low return, there'll be enough activists who will take me out anyway. So I wouldn't be able to execute just give me a few more years and I give you a beautiful one during the crisis, you wouldn't even have the opportunity to do that, right? But when you have very, very high ROE, ROA that basically higher than all our peer banks. And then you go out there and you have a higher capital, then you just have to wait for the perfect store. That's what we do.

Let's hold the perfect storm for a few years out as much as it...

That is good for me too.

I guess you mentioned international. Just remind us when we think about the China -- Greater China strategy, kind of how do you think about investment spend there growth? Are you hiring? Are you not hiring? Are you acquiring clients?

Yes. We actually -- well, first of all, we never once put a substantial investment in terms of investing in assets. In the Greater China region. So as of today, our Greater China, Hong Kong and China combined, the loan is about 4% of our total and then deposit is close to 5% of our total. So it's really small. It's intentional. It's that this is a U.S. bank. And the vast maturity of assets are based in U.S. But it's important for us to recognize that our cross-border expertise, our knowledge about Asia, is the value proposition that we create for East West to differentiate ourselves from the other banks. If you look at us, if you call us regional banks, then you comparing us with all these other regional banks from Fifth Third, Huntington or Comerica [indiscernible] et cetera, right? There is some commonality among them all is that we don't want to deal with the big 4 because they so impersonal, they don't have the community feel they're thinking about all the global economy and then they're always in congressional hearings. And so therefore, you wanted to do banking with us. But to a certain extent, every one of them look more or less the same. They all got that community feel, they are a little bit more relationship driven, but they're more or less the same. But we at East West, we go a little bit further. We said that we understand the international banking dynamic. We're not Citibank all over the world, we're just going to specialize between U.S. and Asia. The GDP growth between these regions is going to be so big. It will take us before my lifetime and still we can rack up growth. Just if we can hone in and be good at it, and but that unique value proposition helps us to generate tons of business. And for one, the demographic we focus on, on consumer banking, with this Asian American population. And -- so culturally, many of them as immigrants to this country, when they first come in, they like to buy homes at 50% down payment because wherever they came from, usually, that's what they need to put in a substantial down payment. When we are underwriting mortgages at 50%, 60% down payment when we are doing HELOC. We're doing a home equity line and 80%, 90% of the home equity line are first trustee, where you can find it from our regional banks? No, right? East West Bank have it, right? So these are automatic money printing that kind of business. And then we also look at when it comes to private equity, when they have international operation in Hong Kong, in Singapore, they think about East West Bank, right? When it comes to entertainment, when they are doing distribution of the films or the streaming content into Asia, they think about East West Bank. Digital media and video gaming and all that. They think about the world market. They think about East West Bank. So we are looking at it in a standpoint is that we have that unique value proposition to bring the business in. So despite the fact that we put very little asset in the Greater China region, we will continue to build up the expertise. We continue to hire senior level people from Hong Kong or potentially from any part of Asia and then even bring them on to Pasadena so that we round up the expertise to make sure that when it comes to the tariff, for example, right now, not just the 10% of China because it's 25% potentially to Canada to Mexico coming soon. Next thing, Europe. Denmark may get even 75% or you give them -- you give to Greenland or you get 60%, 75%, right? Who knows, right? We have a very transactional President who is very transactional-driven. So from that standpoint, I look at it as that for banks that lack knowledge and understand the dynamic of this tariff situation and by the way tariffs is not one-way street. It comes back and hit the United States, too. How many banks today are really focusing on it. They may think that they don't have that exposure. In fact, they have a lot more exposure than I have. The only thing is that in East West Bank, all our employees are laser-focused on it. Yes, for the other banks, they say, "Yes, I have nothing to do with it because they look at their clients, they said they don't look like they are from Asia, and then they just think that there are no exposure. I mean, so it's a very different dynamic, right? So I feel that in the next 2 or 3 years, we may be having a great opportunity to pick up business simply because of the tariff issue. It's our knowledge and expertise they can advise our client better and we are not afraid of that perception risk that caused us to be able to get some strong credit from other banks, when other banks suddenly freak out and say, "Oh, my gosh, there's tariff, I don't want to do banking within this client anymore", right? And then we can actually enter into that opportunity. So we're hoping that may be an opportunity to come to us.

I think you had mentioned this back in 2018, '19, when the tariffs were import of competitors pulling back created opportunity for East West, so make sense. Maybe another piece, which is somewhat new. I mean the East West has been a very net interest income spread revenue-driven bank. You talked about on the call last month, just investing on the fee revenue side, growing some fee revenues. Talk to us there in terms of, one, the capabilities that need to be built out, the investments that's needed? And what's the growth strategy on fee revenues?

Yes. In fact, we started and will continue, but it's always going to be incremental. You are not going to see East West Bank suddenly making a big announcement said, "Oh, we're going to make a $300 million, $500 million investment in 2026 or '27 to get ourselves to be a $100 billion bank, that kind of stuff. We're not going to do this kind of thing announcement. We're going to just incrementally build up, incrementally build up. And both from a technology, from a product capability standpoint, we need to build up. But also more importantly, it's the talents. Talents is not just frontline that can get business, but also talents in the mid-office and the back office, people who manage the operation, who actually manage the products. We need to get all of those right talents to get us to the next phase. And the next phase of East West Bank, let's say, 5 to 10 years from now, you will see that there will be more a higher percentage of fee income than we are today because gradually, obviously, we want to go in that direction. We don't want to be just all spread income. In fact, you saw our fee income every single year for the last few years have always have -- always outperformed -- It always outperform. But relatively speaking, it's still a smaller percentage because we have a big balance sheet. We have a huge loan portfolio. Obviously, there are massive of interest income that overshadow these nice growth of fee income. But while that overshadow now because you have fee income, that doesn't stop us to continue to focus on it because we want to get more demand deposits, and we want to get more fees coming from the cash management. We want to get more foreign exchange fee income. We want to get more wealth management fee income. So those are kind of things we're going to build. And now so 5 to 10 years from now, and you may see that, well, maybe East West Bank efficiency ratio may not look as attractive as we are today. But it's not because we become a bigger bank, naturally, we should be trying to copy the other big banks to have a bigger like 50%, 60% efficient. That's not -- we're never going to get there, right? But it's more like if we're going to build fee income, obviously, you will have a little bit higher expenses, right? And wealth management fee income is going to create higher expenses. But those fee income, those profits that we generated get a higher premium from the market. So one way or the other, I'm still working to create better shareholders' value. It may be a lower efficiency -- maybe not as attractive efficiency ratio, but then it will generate an even stronger premium to the stock price. And that's what we need to work on. So I'm not too to worry about the efficiency ratio. It's really like building up the capability to continue to diversify the income stream to get high-quality income and also to get maybe more diversified profitability so that it's not 100% based on credit to earn our living.

On wealth, I remember many years ago, talking to you, and you mentioned we're not going to win against the big wealth managers and wealth management. So that's why part of the reason at the time East West wasn't competing in that business. When you think about the value proposition the bank had, like what drives those wealth management fees or assets under management to the bank?

So again, you said it just right. We are not going to be copycat and follow the others because then you know for sure, you cannot win because even if you copy them, if you're as good as them at 70%, that's not going to be good enough because even the 100% doesn't look very attractive. So from our perspective is that there will be -- if we are going to be growing more and more on the wealth management side, we are looking at the opportunity of finding talent that can work on cross-border business. If you look at it, it's at U.S. dollar, U.S. currency is still the most important currency in the world. Everyone around the world want to have some exposure in U.S. currency. Even if the stock market is not as bullish people like to park money in U.S. In fact, today, even in terms of deposit, we have quite a few nonresidents [indiscernible] who park their money at East West Bank, just to have U.S. dollar exposure because U.S. is a safe haven. In case something goes wrong, they say, at least I got some U.S. dollar in the United States. I'm sure I can use it. for whatever purpose, if something goes wrong, right? And we mainly in the past and even today, like a parking lot, a parking garage, taking their deposit but we are not as aggressive in terms of offering asset management. We weren't that across it because, frankly, if you look at, for example, like in China, the 1.4 billion people in the old days, Nobody wants to invest in mutual funds and stuff like that. They just buy real estate. They buy residential apartments or they park their money in the bank or they put some money in the United States at East West Bank, something like that, right? But today, they get sophisticated. And China has already opened up. U.S. has not opened up to China. China is open up the U.S. China is they say, "Hey, everybody come on down, get -- put those U.S. funds in and our Chinese citizens love to get overseas exposure, particularly U.S. stocks, right? So they are doing that. So if we are ever going to go even bigger that's the angle, right? We would love to be able to offer something in that regard. Money investing in U.S. stock, but then we are able to somehow put together products that can serve them, and we need to with the partner there to do the distribution, but we can actually work with someone here to go to fund. In fact, we invest in a company called Rayliant, who's doing just that where East West own 50% of it. Yes. So I mean, those are the sort of the beginning of East West Bank coming up with different ideas.

I guess you mentioned in terms of cash management and deposits, just talk to us around what the environment is for deposit growth right now. In terms of deposit pricing, I'm hearing from all banks deposit pricing is just cooling off but your outlook in terms of the ability of the bank to generate deposit growth?

Yes. We have always been able to generate decent deposit growth and our retail banking is always very reliable. In fact, we're in the midst of this Lunar New Year, CD campaign. so far, it's tracking pretty good. And so we expect them to have another decent campaign by the time it's done. And then besides from the retail side with these sort of like CD campaign and stuff like that, we actually -- the retail banking this year have a big goal of growing business checking account. So they are out there looking one customer at a time, finding it. But when I have 100 branches and several of them each branch and each of them go in and get one customer at a time, we can rack up some is deposit customers. So -- and then commercial banking, as we continue to have a full suite of cash management products and we're out there continue to try to bring in more sophisticated commercial clients that are getting tired of the banks that they are doing banking with and trying to bring more.

I guess time for one last question. So you mentioned you've been CEO for 30-plus years and you've seen many, many cycles. Just talk to us when you think about the operating outlook and things can always change, but how favorable does the operating backdrop be it regulations where interest rates are the growth opportunities are for East West compared to the last 30 years on a scale of -- is it the most attractive? Is it less attractive?

I think it's relatively more attractive today, mainly because East West Bank is in a very different kind of positioning versus that we've ever had in the last 30-some-odd years of my career at East West because remember, it was East West Federal Savings Bank, $600 million in asset what could you do? Well, somehow found a way to do something, right? But it was like a pretty pitiful kind of like institution at that size. And then even when we got into $5 billion, I mean, if you look at it, is that someone can approach me, they are $5 billion, so what are you talking to me for, you are $5 billion. I mean I can grow $5 billion in a few months. So those are the kind of situation. It was in a very disadvantaged position. But we somehow find a way to get to where we are today, we're in a great, great position right now with our size with our market recognition with the ability to hire better talent. So with that, I feel really good about where we are. So the key really is that not get all over ahead and then just screw it all up. I think the key is really just making sure that we pace ourselves and bring in great talent and making sure that when I'm not around, many years from now, there's going to be somebody else who can continue the legacy. That's the key.

Many years is the emphasis there. So Dominic, thank you so much.

Good. Thank you.