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

Great. Thanks, everybody, for joining us for our next session. We're excited to have Chris Del Moral-Niles from East West. East West is about $80 billion in assets headquartered in Pasadena, California, with operations really throughout the country and internationally with multiple locations in China and Asia. Chris, thanks a lot for joining us.

Thank you.

Yes. I think maybe just kick it off a little bit. You came out with some updated guidance or updated thoughts on a slide deck recently. Maybe just give us a quick overview on how the quarter is going. And what you're seeing?

Yes. Look, we've had a great year and a continued positive trend with regard to deposit growth. And so core deposit growth has continued to be on a very positive trajectory. The mix of deposits has continued to be positive. And in total, that's given us the flexibility to accelerate some investments and accelerate some lending and all of that has worked out reasonably well for NII and in fact, better than expected given the inflow of deposits that we've seen. That's allowed us to increase our guidance here for NII. And so we've increased the guidance from a better than 7% year-over-year increase in NII to trending towards 10%. That's based off the $2.279 billion of NII last year, which is now trending towards $2.5 billion on a core run rate basis. And we see that because we see the balances have come in, in deposits. We've seen the loans that we made in July and August, and we've seen the investments that we put in place here recently and that collectively is leading us on this journey towards $2.5 billion on a core run rate basis.

On that deposit growth side, where are you seeing that growth? Is that coming from new customer acquisition? Is that deepening wallet share? And how sustainable is that sort of organic deposit growth story here?

So the largest contributor has been our consumer bank. And so our core consumer bank has contributed an outsized portion of that. Product-wise, their largest and best moving product right now has been our liquid CD program, which is essentially a 9-month commitment on rates at 3.88%. It's a lucky number, but the opportunity to withdraw money after 7 days and achieve liquidity. So the liquidity dynamic of that is attractive to our customers. And given that we foresee rates going lower from our perspective, having them withdraw funds and recapturing those funds at a lower rate in the future, it does not pose a particular problem. So it's a low-cost option for us to grant the customer. And we think in the current rate environment, it's attracting a good amount of flow. The second largest component of flow we're seeing actually from small business customers. And so we've got a small business program that we're working with our branches and our retail staff, and it's having good traction, and it's continuing to bring in deposits. And then we've seen some positive dynamics on our cross-border business. And so the combination of those account for the vast majority of the core deposit influx that we've seen, and we think that will be sustained as we move forward.

Maybe when we look at that NII guide and the deposit discussion you just highlighted, how should we think about some of the margin mechanics underpinning that? And if you can talk a little bit about the performance on deposit beta within those categories within those products.

Yes. So if I start with the CD product, of course, we've historically had a good-sized CD book portfolio, which usually see $8 billion to $10 billion of CDs repricing and rolling over every quarter. The runoff rate for much of the stuff that was in a special 6 months ago, would have been around 4.08%. The run-in rate or the new run on rate for a new product is going to be somewhere between 3.75% and 4%. So across the board, it's going to be probably an accretive positive roll-on even before we get to the September Fed rate cut that's largely assumed in the marketplace. Our CDs already reflect that pricing and they already reflect the next cut. And to the extent that there's a third cut in the outlook, they'll reflect that, too, right? And so the reality is we find ourselves in this position where we can see our CD pricing essentially rolling downhill and will continue to be a driver of positive NII dynamics. You would say, well, wait a minute, Chris, you've got a lot of floating rate loans and a lot of floating rate securities, won't that cut against you, you're fundamentally asset sensitive. And while that's true, we are in the long run, the reality is we reprice deposits the same day the Fed moves and our loans often don't reprice until 3 to 6 weeks later. And so there's an inherent pickup that happens. So we're almost instantaneously liability sensitive, become somewhat neutral over the next 30 to 60 days and then incrementally are asset sensitive thereafter. So in this current environment, we think the short-term dynamics are relatively positive, which is why we're positive on our NII guidance.

What about on spreads, especially on the C&I side and CRE? How have those been holding up and reacting recently?

So we're holding the line on our spreads, and that seems to be competitive. We don't see a lot of negative downward pressure on CRE spreads in particular. C&I spreads, it's a very competitive landscape. But I think for the customers that we're looking at, we're trying to hold the line on our stuff. And unfortunately, we're sometimes saying no to stuff if it's too thin, but we're holding the line. We generally are looking at pricing that starts with the 2% and whether it's 2.25%, 2.5% and 2.75%, that's probably the lion's share of our work. But it's not thinner than that in most cases, unless there's something exceptional about it. And it's typically not much more than that because that probably means there's more hair on it than we would like.

Yes. We have a few questions for the audience. Maybe we'll run through those first, and that can inform some of our discussion. The first is what's your current position in East West shares? One is overweight or long; two, market weight; three, underweight or short; or four, not involved. Maybe it's better to phrase it as opposed or not interested.

Well, it was a great opportunity for us to get you all more interested and more involved in the story.

Exactly. Yes, over half currently not involved and then a quarter overweight. Second question...

I feel sorry for those who are short. Particularly in a day, we're outperforming the BKX by 200 points or so, 2 basis points or 2 percentage points.

Second question, which would have the largest impact on improving the relative valuation of shares of East West. One, better relative margin performance; two, above peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchase; or six, accretive bank acquisition. And these are what we're asking all of the mid-caps. So continue to have above-average peer loan growth and more active share repurchases. I think we can get into that in a little while, but...

Both of those sound like put the capital to work, which I think we would take as a positive shareholder messaging, and I think we're generally a shareholder-friendly organization.

Great. Number three, what will organic loan growth be at East West in 2026, 1% to 3%, 5% to 7%, 7% to 9% or 9% plus. 7% to 9% and also a solid almost 30% at 9% plus. That's...

Setting the bar there. I haven't locked in the 2026 budget, but I think I have some input here. I appreciate my shareholder confidence in the ability to deliver that kind of growth. So...

Number four, if East West were to use excess capital for M&A, which type of acquisition would be the most well received by shareholders. Number one, a deposit generator tuck-in; two, an asset generator tuck-in; three, a fee generator; or four, a whole bank acquisition. So almost half, I would say, a whole bank and then 40%, 39% on the fee income side.

Well, I might just pause on that and elaborate just for a second because I think as we've looked at the banking landscape, I think one of the challenging things is when you think about banks that are generally smaller than East West, and you think about the things that would be attractive to East West, right? There's obviously certain geographies and demographics that we'd like to have more of. That having been said, we also would rather have less CRE concentration. We'd like to have more noninterest-bearing deposits, and we like to have more fee income to total revenue in the acquisition. And so when you look at the universe of banks that are generally smaller than East West, there are a few that have less CRE, more noninterest-bearing and greater fee revenues. And so the whole bank acquisition landscape that really sort of fits with what we're trying to drive the entire bank towards would be unfortunately, probably taken a step backwards. And while we are a very efficient bank, the reality is taking cost out of the bank require effort, and there are almost no banks in the country that are more efficient than us. And so that inherently poses a challenge where we can't really look at this the way other whole bank acquirers have looked at say, yes, we're just going to go there and strip costs down because the costs actually be gutted to get to our levels. And they're probably not the core profile that fits the growth profile of what we're looking for. And so our focus, and I appreciate the feedback here on whole bank, our focus really has been on fee and I'll say, not asset generating, but asset management, wealth management generating opportunities as sort of the focal point, right? So I know that's asset generation, we don't need that much help on core lending generation. But we'd like to put -- we'd like to take the deposits that come to us and where possible, obviously, put them to work to help support loan growth, of course. But where excess deposits are coming in, one way to put them to work is in securities, which we've been pretty efficient at over the last year. Another way is to divert them to off-balance sheet investment opportunities that serve the customers' interest and create a fee revenue stream for the bank. And so our focus has been a little more in that space, and that continues to be, I think, where we'll spend more time incrementally as we look at the next year.

Great. And the fifth, what do you think happens to Category 4 bank regulation, but really bank asset size. One, nothing that stays at $100 billion. Two, we see a change where the level has increased with inflation; three, it's moved to $250 billion; or four, an asset size is removed and it's more of a qualitative test. So overwhelming majority, 2/3 think it moves to $250 billion.

I love the enthusiasm. I look forward to that being the outcome. I do have to note that someone pointed out to us not too long ago that the Fed has gone through a process of tiering all the banks under $100 billion. We brought them into 4 different cohorts. So we have the pleasure of being in a Tier 1 cohort, and there are, I think, 7 banks in the Tier 1 cohort, which is banks between 75 and 100. And so as pointed out to us, that means there are 7 Congress people that care about this moving because there's only 7 banks in 7 districts that are finding any pressure to see this move. So legislatively, to the extent that is relevant to this action, congressionally, there's very little political capital behind making a move. But to the extent the Fed can move things around on its own powers, we'll see how this plays out.

We can all hope.

I would say that the tone -- and this isn't the question, but the regulatory tone has markedly improved. I mean you're probably hearing that from others. But generally speaking, if there was a tense conversation a year ago, it's not nearly that today. And if there was a dialogue that requires some back and forth, there was a lot more pushback, let's call it. And today, I think we're feeling a lot more of people putting their best foot forward when there is differences. And so I think that generally bodes positively, and we think that bodes positively for how things evolve going forward. And we're very pleased by the dialogues we have with the regulators today, and they continue to see seemingly move in a very positive dynamic. So we're optimistic that things will get -- that there won't be impediments to the growth plans and the strategies that we are putting forward, which is all we ask for.

We heard that this morning from Jonathan Gould, the Controller of the currency, really trying to refocus back on the core mission of the regulators as opposed to the political mission that has implemented or creeped into it over the last 4 years or even more than the last 4 years. I guess maybe looking or following up on the fee income side, fee income has been very strong. You've had that be an initiative for a while. You've talked about the potential to add there. Do you think you have the pieces in place right now to continue to see good growth there? Or would it really require some inorganic mechanism to see a meaningful move higher in fee income?

Well, it's worth noting with the pieces we have in place today, we've been driving record fee incomes and in some categories, 40% year-over-year growth. So to answer your question directly, yes, we have what it takes to grow meaningfully and deliver a positive trajectory on the various fee income side today. That having been said, it's a bit -- the more you know, the more you know you don't know. And we're finding that out here in our wealth and asset management business. The more we're doing and the more customers we're interacting with and the more we're pursuing that, the more we're realizing we have some gaps in our product capability and in our expertise delivery, and we recognize there's opportunities to fill in those gaps and deliver even more over time. And so yes, we've been successful growing those fees. Yes, we've been successful at driving that customer acquisition. And yes, we recognize there's more we could do, and there's probably more fees and value could capture for our shareholders. And there's more value we can deliver to our customers if we could fill in the capabilities a little more. But the answer is yes, there's more to be done. And yes, we will probably look to complement our organic build of that business with some acquisitions or partnerships or investments.

When you look at the organic build of fee income and the broader organic build of growth, are you going to be able to do that and maintain your class-leading efficiency ratio? At what point, whether it's asset size and continuing to make investments for what's now Category 4 thresholds as well as building out fee income that generally is less efficient. Maybe it's still providing good ROTCE, but on an efficiency ratio, it's more expensive. How long can you keep the efficiency ratio sort of in this range?

Well, I think Dominic is on record of saying he's okay with the efficiency ratio creeping higher as long as we're consistently delivering top quartile ROTCE type returns. And so the focus is to deliver quartile returns consistently to our shareholders, which he has a 33-plus year track record of doing. And he does not intend to disappoint on that front. And I don't think he'll let us. And so we'll continue to drive that. And if that means that through the investments that we're making and the partnerships, acquisitions or others that we strike, the efficiency ratio creeps up a bit. He doesn't seem too concerned on that outcome as long as that means revenue is growing and the bottom line is growing in a way that's driving accretive capital returns, that's in the best interest of shareholders for the long haul. I think that answers the question.

Yes. Maybe when you look at the work the bank has done as you've grown asset size and preparing for that $100 billion, what could be some of the -- if we do see an increase in the threshold, where could we see either savings or money released to be able to be invested in other areas?

Yes. So I think there's -- Dominic used the analogy at one point in time that the regulators are a bit like parents, right? They are happy to remind you that you should be putting your code on because it's getting cold out and you should go outside. And when you're a child, that seems a bit annoying. And as you go up, you come to recognize yourself and you put the code on yourself. And so we're at the point where we recognize when it's cold out and we should put a code on. And to a certain extent, we recognize that the cyber threats that are out there, the dynamics around system access management that are prevalent across all landscapes and platforms are real that we need to make sure we have super harden defenses for. And those investments are going to be front and center. At the same time, we realize that customers' demand to be -- have access anywhere and everywhere. And in our case, that means anywhere and everywhere in the U.S. as well as in various regions around the world is such that we need to be able to deliver that capability seamlessly across multiple platforms and multiple geographies. So there's a challenge there that we'll have to continue to invest in to make sure that we're delivering the right security with the right access for our customers. We also recognize that the capabilities and expectations are only growing. And so if there's a threat for real-time payments, well, then we need to figure out how to make our existing payments platforms close to real time as possible, make them as frictionless as possible, and we're investing in those today, right? So we're not waiting to see what happens, where you going to see what people evolve to a year from now. We're going to make it possible to move money seamlessly between geographies and portfolios instantly. And that's not a capability that many have, but it's one that we think we'll be able to deploy in short order for a number of currencies and geographies, and we think that will be a competitive advantage. And the fact that we're moving faster than some others is a good thing. But that requires investments, and we're making those investments that require some effort. And so we'll continue to do those things. Are there enterprise risk functions that come along with that, that we're building the one side that to make sure that all of that is done the right way, absolutely. Could in theory, we dial back on some of those because they're not required? We might. On the other hand, they're there for a reason, like risk management and the fraud risks in the world are not getting smaller. And so to a certain extent, I think the investments that we're making now are consistent with best banking practice, and they're largely going to continue. Are there additional administrative regulatory form filing pieces that come? Yes, then they come a little later. And as we're at $80 billion, we haven't really started to sort of expend a lot of resources on those, but we're building the teams and capabilities that we're ready to. And so we'll continue on that journey. But Dominic's plan is not to hire an army of consultants to do this for us. It's to hire the right people that can help us get over the right hurdles in the right time lines, so that we have all the preparatory work that we need to do ready, and we have the muscle to move forward when we need to be, but not necessarily sooner than we need to be. So we're going to build, we're going to build the teams internally. We're going to build things organically. We're not going to outsource this to the big 4 accounting firms or something. We're going to do it ourselves, and we think we have the right team to do so, and we'll do it in a cost-efficient East-West way. And so I think we'll continue on this path. If the burden of regulatory expectations shifts to $250 billion or some other level, that will give us more breathing room, but we'll still become a better, faster, stronger bank as we move forward.

Growth has been a hallmark of East West for several years. You've generally been able to surpass initial expectations for guidance on the growth side. How has the bank been attracting new business customers over time? And how is that -- how do you anticipate that changing going forward as that velocity continues to stay strong?

Yes. So I think in some of our demographic and geographic submarkets where we've got particular market presence today, we have the benefit of sort of being the incumbent leader, and we're capturing share almost just because we're there, right? So we've got greater than 50% market share in certain geographies. And that's a leader's advantage, right? We recently did an analysis on San Gabriel Valley, if you strip out our El Monte region, which is sort of where we book a lot of corporate deposits and things and you look at the rest of the San Gabriel Valley, which is sort of the valley where we traffic in, our 20 branches in the San Gabriel Valley over the last 5 years have attracted more deposits than all of the BofA and Wells Fargo branches, which add up like 40 branches in the same market versus our 20. So pound for pound, branch for branch, we outperform even the leading brand franchises in the United States on deposit growth in core markets where we focus our attention. The question for us is how can we find that focus in some other regions and geographies. So we continue to sort of roll this out in a concerted focused manner, but recognizing and capitalizing on our strengths. And we've done that very effectively in Southern California. I think there's more opportunity that particularly in Texas and in New York. There's other markets that we're focused on as well, but those are 2 that are large and come to mind where we lack the penetration, but clearly see the potential for substantial expansion over time.

Let's check and see if there's any questions out in the audience. We have a microphone. No, [ short ] group right now. Well, maybe we can look to the single-family residential growth. That's been a meaningful contributor overall, and you have a unique market position there. What's been the impact of the increased uncertainty with the trading relationship with China on capital flows that you've seen? And is that impacting the pace of home purchases and capital coming into the U.S.? And do you think that the current rate is sustainable?

So there's a lot in that question. So I'll stick to single-family and we'll come back. So the short answer is we have seen consistent application volumes, transaction volumes, closing volumes in our single-family portfolio over really the last 9 months. There's not a material change in that flow. And the dream of American homeownership is alive and well within our client base, and they continue to come to us for our differentiated product, which continues to appeal to a certain subset of the market, which we're able to deliver at a slightly better net yield to us than alternative products and yet on terms that our customers find very acceptable and are more than happy to sign up for. And that continues to come in. It's hard to say it's not like clockwork because it feels like it's like clockwork. It continues to come in remarkably consistently and the pipelines are remarkably refilling. Even at the residual rate levels that we're seeing in the marketplace, which are higher than they were for most Americans to refinance at some point in pre-COVID or during COVID, there's still steady drumbeat of flows at current levels is a good thing. And it continues -- we have a pipeline that we know loans will close here in September, October and into November, and that pipeline is full and continues to refill with each closing thereafter. So it's a good thing, and it's going to continue positive trend. It hasn't stepped up, but nor has it diminished despite all the noise that we've seen in the headlines of trade things in the last 9 months.

Yes. I think it was maybe on the April call, Dominic had pointed out that the actual direct impact on the C&I portfolio with cross-border trade is 1%, I think it was. What -- how is the the tariff environment and the trading dynamic with China impacting at all sort of the broader sentiment of your customers, even though it's a relatively small impact today compared to several years ago?

Well, so I think one of the things we would point out is deposits are up, right? So deposits across the board are up. And so to a certain extent, that means at some level, either folks are making more money or putting less money to work and choosing to put more into liquidity with East West. And the reality is we think both of those are true, right? We think the reality is we have a core consumer demographic that is disproportionately professional class, higher income, higher net worth, also disproportionately entrepreneurial that has been winning in the current economic context for some time, continued to win. And at least if I read some of the headlines, they're probably representative of a good portion of that top 10% that's continuing to spend. And yet they're also continuing to save and accrete assets. And so that's a good reflection of a good cross-section of some of our customer base. And so we're participating in their continued savings and participating in their continued growth. Second component is there's a portion of our business that's involved in bringing goods from Asia, selling them to U.S. retailers and collecting them and plays a middleman role. And those businesses continue to have it appears invested early in this trade dynamic, seeing the potential for risk, increase their inventories and have been successfully selling that off at the same or sometimes higher prices and reaping a small benefit in the interim. And that has probably somewhat reflected itself in the higher balances as well. And so that combination of factors, the benefit from retail plus the benefit of the cross-border has been a net plus to deposit levels, which has allowed us to do this lending. We haven't seen the cross-border lending really move that materially. And so the reality is it just hasn't manifested itself yet. And perhaps it's still because there have been multiple delays to the tariffs. There have been multiple delays to the de minimis package dates, et cetera. Now that more of those things are sort of looking like they've taken hold and haven't been further delayed, we expect we'll see some incremental impact as we move forward. But to date, it's been nominal. And to date, loans and deposits are up. So despite all the headlines, loans and deposits are up and therefore, NII is up and margins holding up.

Great. In China, you have about, what, $2 billion of footings, maybe a little more. I guess it's been a while since we've got a full update, but any change to the outlook or the positioning?

No. Again, we have more deposits than we have loans. And the activity there is really focused on those that have some interaction or dependency with the U.S. market, right? People don't go to our subsidiary entities because they want to do domestic business, right? And we do no commercial real estate business, right? So it's -- you have a commercial purpose that involves U.S. dollar receipts, that's how you become engaged or go look for a relationship with East West. And so it's those folks that are -- have been exporting occasionally are importing. And so the focus is on U.S. dollar deposits and the receipt of those deposits back is the biggest piece. But even some of our balances overseas are actually U.S. dollar deposits simply held in our Hong Kong or Chinese subs.

Great. Maybe shifting to credit. Credit has been very good as we -- for a long time and certainly as we move through COVID. Are there any areas you're more focused on today than earlier? And I guess, how should we think about expectations for losses given the allowance has been growing while NPLs and criticized classifieds have been declining?

Yes. Look, I think as we continue to grow the balances overall of the balance sheet, you'll see the incremental levels probably of NPAs tick up a bit in dollar terms. Percentages perhaps won't move that materially. But dollar terms-wise, as we grow the portfolio, those dollars will grow. That having said, if you'd asked me earlier this year, I would have said we were still working through a lot of the names that I had heard when I first arrived. So there's sort of a 12- or 15-month window where we were working through a lot of the same names. The good news is a lot of those have resolved themselves and they've gone away. In some cases, they've been sold off. In some cases, they've been fully paid off, a confluence of different factors that have led to changes in that portfolio mix. The bad news is they've been replaced by some new names, roughly in the same level of magnitude, but I think it's positive that we're working our way through credits and that we're proactively continuing to sort of be very active around prepositioning for challenges that we see in the current environmental context. I also think I take the heart on Dominic's comments from earlier in the year where he basically said that we saw roughly 150 basis points move down in the Fed, he anticipated a lot of the concerns around CRE would be dialed back. We note that we've seen 100 basis points already. We largely expect 50 basis points or more between now and the end of the year. So to the extent that we dial back sort of the concerns in CRE land, I think that will go a long way towards giving us more comfort with where we are. And I think we're provisioned obviously at the right level or we wouldn't have signed off on that level. But I think it's a level of overall reserving that is consistent with some of the strongest reserve levels we've had and reflects our positioning for what may come. And so I think we are in a good place, and I think we're well positioned. If there are further challenges to the economy, we have the reserves and the capital to absorb that. And if there are no further challenges, well, then we'll have plenty of upside for our shareholders.

On the capital topic, East West has led peers on virtually all ratios for for several years since you've joined the bank.

Dominic is quite proud of 10% TCE.

Yes. I think since you joined the bank, we've seen the increased use of the buyback on a more regular basis. What are your thoughts on optimal capital ratios for the bank today given the broader environment? And should we expect to see buybacks have a bigger impact in coming quarters as you try to maybe manage to that?

Sure. At the end of last quarter, we had a little over $241 million of remaining authorization. We'll continue to look at that. Obviously, our first and highest use of our capital is to support our customer balance sheet growth. You can see the balance sheet has grown. I think you mentioned the $80 million. That's up from the number we posted at June 30. So we continue to grow our balance sheet for our customers' benefit. We continue to make loans. I think we'll continue to be thoughtful about the dividend. Dominic has a long-standing 30-odd year track record of improving the dividend on an annual basis. And I'm sure we'll continue to look at that very carefully as we go into the fourth quarter for the first quarter next year. And buybacks will be one of the tools that we look at to manage. On the one hand, I think we're very comfortable having a 10% TCE when we're delivering top quartile returns. And so as long as that dynamic is happening in concert with each other, we think it's a really good place to be. High levels of capital with high performance, not a bad outcome for banking. If that dynamic changes, we'll obviously be very thoughtful about that. But for the moment, we will continue to grow NII, grow fee income and grow the bottom line. It feels like we can be a little opportunistic around the share buyback and perhaps have earned the right to be a little more patient on capital deployment.

So no sort of ratio target, whether it's CET1 or TCE that you feel is the optimal level for you. It's just as long as you're able to continue to put up the ROTCE that's the...

Dominic's on record that likes having a 10% TCE, and he's also on record that we're going to deliver top quartile results.

Let me see if there's any questions in the audience. I don't think I see anything. Well, thanks. I mean, if you have any closing comments?

No. Look, I think it's proven to be an interesting year. I think we started the year knowing new administration, there would be changes. We are encouraged by the changes that we see in a variety of regulatory conversations and the landscape overall for banking has improved. I think we were apprehensive about what might happen on international trade and dynamics. The reality is 9 months into the year, we're seeing those still with some apprehension, but the reality is our core business fundamentals have continued on a very positive trajectory, both on the loan deposit credit and fee side. And so we continue to be fairly optimistic about our customers' prospects and therefore, the bank's prospects here as we move towards the end of the year. We expect rate cuts to have some impact, but the reality is a December rate cut will be sort of a nonevent to anything that happens this year. And the other 2 cuts to the extent there are 2, will probably be, at this point in time, offset by volume. So we feel pretty good about the guidance that we've given. And obviously, we just updated the guidance and the general outlook. So we're hopeful that investors, those particularly not involved in the name right now, would be willing to take a good look at significantly growing high deposit outcome-oriented institution that is delivering top quartile returns over time and has the capital to do the right thing as needed in the future. Thank you so much for listening.

Great. Thanks very much.

Thank you.