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

I think what we've been endeavoring to do on the C&I side is diversify, diversify, diversify. And so we have the north star of balancing the 3 portfolios is 1/3, 1/3, 1/3 between the single family, the CRE and the commercial. And then within each set of commercial, we endeavor that no subset of that should exceed more than 5% of the balance sheet. And that's not a fixed formal cap. But through our risk management approach is we're managing essentially caps in that neighborhood. And to date, none of the portfolio categories exceeded 5%. And so we'll continue to diversify that as we continue to grow. That means we're relatively more capped out in, say, PE and entertainment where -- which are 2 big verticals of ours and less kept out in some other areas. And so we'll be focusing on trying to continue to build out more diversification of the volume and the business mix and the C&I book over time.

When we were here last year, we were looking at the potential for rate cuts. This year, we're looking at the potential for rate hikes. Investors are often focused on the margin, but management continually emphasizes net interest income. How are you thinking about balancing growth, deposit remixing and margin to maximize earnings in an environment like we're seeing today?

We'll continue to deliver double-digit ROTCE continue to deliver top bottom line EPS growth. And I will continue to pull the levers along with my friend, Mr. Matin here in the front row on deposit pricing, loan pricing and balance sheet allocation to create that environment. And if that mean margin goes up or down a few basis points, I'm less worried about that as long as than driving top quartile ROTCE returns on capital, which we have a good track record of a couple of decades of delivering and at least it's under Mr. Maten and 3 years of sustained and continued expansion of that. While rates went up, well rates have come back down. while rates may or may not go up again in this last 3-year window at least, with some liquidity questions into the industry with some tariffs on the industry with some oil price hikes and oil price drops and a few other curveballs. We've managed to consistently deliver protein 17% ROTCE. That will be the North Star top quartile returns with a strong level of efficiency and the balance sheet management, I think we have enough levers to pull to make that happen.

Earlier on, you mentioned the importance of revenue diversification. Fee income has consistently grown faster than I think many investors have expected, which fee businesses are creating the most opportunity today?

Wealth and wealth, followed by some FX and deposit-related fees. And so when we think about where we see the opportunities and where we've seen the most growth, it's been on the wealth front and that continues to be where we're investing incrementally. We have spent the better part of the last year earnestly and Dialogue trying to find a wealth that perhaps it could bring into the fold that would help accelerate those endeavors. That has proved unfruitful so far. And so we -- I won't say capitulated, but we finally throw in the towel and opened up our own RIA this quarter. We'd be in the process of pulling people into the IRA from the private bank and other areas, and we'll continue to build that up, and we've continued to hire into that group and will be a source of further growth and expansion of fee revenue lines within that capability with that addition. And that's proven further returns positively, and we have optimism that will continue to be a feeling for us for fee income growth in the quarters ahead.

When you look at the investments in wealth management, how much more outright investment is there? And how would you describe sort of the runway that remains for growth?

The runway is unbelievable. And what we are seeing is a combination of our richest core domestic markets, there's a huge untapped opportunity for us that to date, we have allowed to flow out through the likes of Morgan Stanley and Merrill Lynch and Fidelity and [indiscernible] where we know we can see the outgoing wires and the activity from our long-standing customers who have built their wealth over is not generation, certainly their lifetimes. And we're disappointed that they haven't looked to us as that partner for that next leg of their investment because perhaps we didn't have the full breadth of capability. And so we're making men here to sort of rise that gap and offer them more and more solutions, more services and more compelling support. But that's an existing base that's been there and is now flowing away from us that we know we can capture and we are bringing people on and help us retain those funds and then capture that incremental activity. In addition, we recognize there's an additional newer set of funds and flows that are coming from abroad where people continue to look at the U.S. market as an attractive place to put money to work or alternatively, as a place where money has come to them because Walmart paid them and they decided to pay leave those funds in the U.S. for further investments and decided that part of the investment strategy would be either fixed income or equity securities. And as part of that strategy, we're putting some solutions in support for that. And a combination of that core consumer market that's really fueling this, some private banking that's additive to that and some corporate cash management that's additive to that is all driving a very positive dynamic for our wealth business activities.

Not to take anything away from the Momentum Wealth. But beyond wealth, are there other opportunities to grow fee income that are...

FX and core commercial deposit services. So on the FX side, we have a very robust FX business. But the reality is we also recognize we haven't delivered the full suite of solutions that some of our larger bank competitors have the largest bank competitors, right? And so the reality is we're competing in solutions offered by HSBC or Citibank that are at levels that we haven't seamlessly integrated the way they have we can deliver the outcomes as quickly and efficiently as they can because we do have the licenses in Hong Kong and in China to deliver those solutions and services in real time. We just haven't packaged, delivered it the same way they have. And so we're in that repackaging and delivery mode. But the early returns on our most recent integrations have been extremely positive, and we continue to see that lift through in deposit management fees, and we're beginning to see that lift come through in foreign exchange activities. So up until very recently, if you wanted to trade FX with [indiscernible] bank that required a phone interaction at some point. It wasn't a fully online enabled solution. We are now offering that for certain customers in certain segments, the ability to do straight through from multiple currencies back to dollars and back to other currencies in various ways. And that is creating a new pipeline of revenue streams that we haven't really tapped into before that we're able to deliver on direct now. And I think that's an incremental opportunity for us that has been about a year plus in the making, but we're seeing now beginning the fruit to be born from that activity, and we see tremendous upside from that as we continue to deploy that in a way that's more seamless and visualized to our customer. Because the reality is if it's not on the mobile phone, the capability doesn't really exist. And so the reality is we need to offer that seamless ability to move from euros to dollars or dollars to Hong Kong dollars or Singapore dollars seamlessly on their phone from account to account. And offer them a real life exchange rate as we make that transfer in order for this business to really pick off. And we've just started to offer that capability, and we can already see there's upside there.

Maybe shifting a little bit. The bank has consistently invested in technology and customer-facing capabilities. Where are you seeing the best returns on those investments today?

So the short answer is cyber, cyber, cyber and multifactor multifactor, ensuring our clients' safety and stability of access to their funds in a fraud-free environment is sort of job 1, and that's where the investment dollars have gone. Sometimes that doesn't come across as the most client-friendly, but I think the clients who understand that safety is job 1, appreciated and respected. And so I think that's where the dollars have incrementally been funded. On the secondary part, as I was just saying, visibility is seamlessly look across your accounts. There are 4,000 banks in the United States. I don't think many of them offer multicurrency accounts in multiple jurisdictions. So we're 1 of the handful of banks that do that with regularity, but the ability to then offer that on a mobile platform will position us as a small handful of banks. And I think that's an important capability for us to have, and we're building that capability [indiscernible] continue emphasis.

Can you share with us how you're currently evaluating AI across the franchise. Where you see the most promising opportunities internally? And where could AI specifically eventually help with improving that planning experience you've been talking about?

Sure. So first and foremost, as probably many of us have, AI is now sort of an integrated part of everything, whether it's my e-mail or my word document. I used to think I had to click on the sort of spell check, it sort of somehow seems to do it for me now automatically, which is great. So 1 thing to notice is the consistency of language use across the departments and teams has improved. I don't know if that's because we all took remedial English classes where we go -- Yes, I just makes everything come across more consistently. I'll go with the latter at this point in time. The consistency of our PowerPoint tax internally, and Dom's not big on PowerPoint Dex, but Mike can't lose my investment banker background, so I am -- has improved dramatically. But the other dynamic is, I had a treasury team before and Mr. Madden's here, we had a couple of people that would be the go-to people to get something new or different built, different way of looking at things, and then it would take time. And today, we have -- it feels like at least a half dozen, if not more, maybe more like a dozen people that we can say, hey, can you go build this dashboard? And in a matter of days, I'll get back a dashboard that shows something that I'd never seen before from a different perspective. And the reality is the combination of having the data, which, as I said, I think to many forms before, East West is 1 of the most data -- it is the most data-rich bank hasn't had the opportunity to work for. There is a question you have about where a transaction happened, who did it, when it happened, what all was what fees were paid. Any of those questions, we can get to that answer faster at East West in any place of work before. And now we can display it. And I can take a new question and give it to someone, and that will come back to me in a very short order as a HTML Python web page and/or as a Power BI dashboard and it feels like a very short time frame, telling me exactly what I need to know as well as perhaps a bunch of things that I didn't know I needed to know that jumped out at me from the data. But the ability to sort of get to the data, scrub the data, present the data and come to conclusions is remarkable, and it's only accelerating every day. Part of it's AI, part of it it's dashboard and technology. Part of it is just training your team how to use stuff and think about things differently. And the fact that we don't have to go to Three years ago, I wanted to see where all the ACH and wires were coming from, from which customers to -- from which tenders. How much is Walmart sending to how many of our customers every day? And how much of that Walmart deposit goes to how many different accounts over the course of the month or quarter or a year, and I can see that. But I had to go to IT, have them develop that had Power BI that was 3 years ago. Today, there's at least half a dozen people and Chris Madan's team that could create the best word for me, and I would have it within a day or 2. And so that cycle turn for ask for something to get something back. I just dramatically enhanced our ability to ask questions and to the right answers sooner.

Maybe shifting to credit. Credit quality remains among the strongest in your peer group. What areas are you receiving the most attention internally today and where are you becoming more comfortable?

So unfortunately, CRE continues to be sort of the focal asset class, CRE office specifically, and it's where we'll continue to expect to see some things going to the night. But the reality is, we literally only have 10 credits that are CRE office credits over $30 million. That totals $387 million. So as an order of magnitude of exposure to the entire bank, no single CRE credit you're going to too much of a challenge. It's not going to put to talent, so I think. The reality is much of the other portfolios are doing just fine. And so it's not a particular moment in time of concern the way it has been at other moments outside of CRE office. It just hasn't [ NS ]. We had some marbles in technology. The back a couple of years, we had some marbles in energy going back more years. Today, those industry-specific cycles don't seem to be handling any particular concerns.

Anything that's a new opportunity coming out of some of that evaluation where you feel like you can get...

No. We've seen a lot of data center-related activity, and we just haven't found the right way to approach those credits to be an active -- more active participants. So we haven't been. I think we've seen a lot of newer PE-related activity come our way in part because of our concentration already in that asset class and in part because I don't think we feel like we need to stretch at this point in the cycle. We haven't pursued a lot of those, but there's more out there. Where we have seen opportunity is, in fact, as there's been competitive disruption in the landscape of other banks, we've seen the opportunity to pick up specific individuals and specifics even teams in some cases. And so we have been actively picking up additional expertise, whether that was in chartered schools or aerospace or some specific verticals within the entertainment industry. We've added selectively to the teams and are looking at some team with Delta to further bolster our capabilities. We've also added on the credit side and the communication side. And I think those ads on the personnel side will give us the opportunity to tap into some new opportunities, specifically, I'd say, in Southern California.

Great. East West continues to hold on the strongest capital positions in the regional banking group, while still producing approximately 17% ROTCE. How do you think about the balance between maintaining strategic flexibility and optimizing capital?

I think the core strategic and financial outcome for us is to continuously drive towards top quartile returns. And I think as long as we keep that sort of the North Star for our activities, and we continue to deliver against that. I think we'll find ourselves airing on the balance of maintaining our position as the strongest bank in -- amongst the regional peers, with the strongest level of capital as long as we're delivering a top quartile level of churn. If that balance changes, we'll certainly be quick to reevaluate that. But so far, it's been a pretty good track record. And at the margin, the reality is we have more than ample capital to meet all of our customer loan demand that we're seeing, which is great. We're also funding that from core deposit demand, which is even better. It means that's very attractive organic core business that sustains that high-teens our OTC level, and we're very, very, very engaged and interested in driving -- continuous driving that momentum. What we have found is it's important to have a competitive dividend over time. We raised the dividend by 33% earlier this year. I think we'll be happy to revisit the dividend at the end of this year again. And probably if the economy continues to be fairly robust and our trends are as they are, we'll probably be looking to increase the dividend again as we have in prior years. And beyond that, we've looked at M&A, and I think the phrase I used in 1 of the meetings earlier today is we found the opportunity sparse. And with that in mind, that will leave us probably with some capital. And what we've done in most recent quarters, we've applied some of that incremental capital and funding from deposits to help bolster the liquidity profile of the bank. We'll probably do that some more. And beyond that, we've also proven our tops to buy back stock sometimes in size, and that will always be a lever for us.

On the M&A front, I guess it's been a little while since you've done a deal -- when you look at the environment being sparse, what would you look for in a bank? What will be attractive to get you off that 12-year, you just...

Yes. So I think some of the acquisition history of the bank was in rolling up smaller community banks. And I think at this point in time, Dominic has given us a direction that $1 billion or $2 billion banking addition maybe isn't the right way to spend our energy. So that's a quarter or 2 of growth, and that still take a couple of quarters to close. It might just be more of a distraction than value-added opportunities. And so that has taken our attention away from those small opportunities on the core banking side. If it's 5% or 10% of the balance sheet, it's probably enough of the level to get our interest. There are fewer of those opportunities out there. And the reality is they tend to be priced relatively inexpensively because they have hair on them or growth challenges or both or they priced -- they're doing very well, and they're priced exceptionally well, which is not really of interest to Dominic either. And so I think he's looking for something that he can bring value to as a franchise, that we can add value to through our customer relationships in a way to some capability that they have, and we just haven't found that combination yet that makes sense for us. We've also spent the last year, as I mentioned earlier, focused on wealth management oriented M&A. And this hasn't proved to be fruitful the way we thought it would be. And so we'll continue to keep that store open and continue to look for opportunities, while we continue to build out now our own RIA and our own capabilities along.

Great. Well, thank you very much. We're at the end of our time. But thanks for joining us and looking forward to seeing you next year.

Great. Thank you. Thanks.