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

Right into my next question. You've built up this reservoir of liquidity in the investment portfolio. Can you just explain your thought process and behind the build and then how you're thinking about on balance sheet liquidity going forward?

It's never been a better time in the last 20 years to buy bonds. It seems like a perfect view.

Okay.

There used to be equipped, Terry, you probably remember this, California thrifts would take the pauses of 3, make loans at 5 and California bankers would be at the beach or on the golf course by 3, right 3, 5, 3 I don't think Dominic is going to allow me to get to the beach or golf course anytime in my career with him. But taking deposits at 3 has been viable. I think our weighted average cost of funds last quarter was 2.81% on the interest-bearing -- it's been rare for me to be able to invest in a Ginnie Mae security with 0 risk weight and earn better than 5% like I can now. And that means it's pretty easy to maintain a 3% margin, even if not much else is going on in the world, -- and there's other stuff going on in the world. So hopefully, we'll do better than that, and we have. But it's a pretty easy starting point to be a banker if you're somewhat risk averse and have a high high appreciation for liquidity.

Maybe 1 more question, then I'll open up to the audience. Rates have moved higher, expected to continue to move higher. Mortgage activity slowed down, that really hasn't been the case at East West. So just kind of remind us of your differentiated mortgage product and market position and essentially, how you're able to kind of keep that growth going?

The bank's founding product back in the early '70s was to meet the needs of immigrants into at that point in time in Southern California, looking to buy into the American dream, looking to buy that home. In what was not too many years after Brown Board of Education and then sort of social, call it, Red lane that was active and pervasive across many markets. And so the banks stepped in to create the right environment to create the financing to allow those folks. But traditional underwriting didn't often apply well, and the program landed on, well, if you can put half down we will help you with the other half. And over a 50-plus year period, that program has worked out really well. And what's interesting is you sort of think about the more recent years of that program, while it still is attractive for our immigrant communities, it's also attractive for anybody with episodic income. So I think anybody fill me the Netflix episodic series or think about anybody who fill me the movie, where they make money for a year and then they don't or they make money for 5 years and then they don't. Those income flows don't often work very well in traditional underwriting models. But at East West, if you can put half down, we can help you find the other half and put it in place. And an interesting by-product of that is folks that are attracted to that product are sort of structurally definitionally less freight sensitive because they're only borrowing 5/8 as much at most, and in some cases, even less. And so the reality is it becomes a less rate sensitive, more consistent product for a niche customer that has outperformed all the credit boxes that I'm aware of for more than 50 years. And so it's a product that works really well for us and for the customers that find value there. And that niche is 1 that we have continued to grow. It was the largest source of growth for our loan portfolios in the third quarter, and it will likely be in the fourth quarter as well despite perhaps others mortgage slowdown.

Perfect. Any questions...

I also note that it's our least concentrated subset of our portfolio. And so we think Dominic strives to be diversified in everything we do. And if I think about the relative weights of CRE and C&I, we're relatively underweight in single-family and consumer. So doing more there is helpful to the overall diversification.

Jared DAvid Shaw from Barclays, you've been having good success growing our DDA and retaining a lot of the -- what's your updated thoughts on deposit costs as we head into the end of the year, you have to either?

Yes. So the Lunar New Year will be in next year first quarter event, really kind of February centric. I think the interesting question is what happens to market rates broadly between now and then. What we observe today is that our current CD specials, which are at 3.68% for 6 months 3.7% for 9 months and 3.88% for 12 months are markedly below perhaps marketplace levels. 50, 75, 87 basis points below what customers could probably go online to Schwab and Fidelity and find as alternatives. Despite that price discounts, we are maintaining our CD balances. Now will that hold if rates are another 25 or more basis points higher by the end of February, we'll see. But right now, we're able to retain that flow at a very attractive level for East West as a funding source without having to pay full market rate, and we appreciate our customers' loyalty and restraint during this interesting time. On the DDA side, where we have put an emphasis on growing the balances, we've had, I think, what can only be termed as a remarkable success. We sort of changed the way we incented folks. We changed the way we gold folks last year that had a positive effect. So we sort of doubled down going into this year, and the outcome has been fabulous. And so I give credit to our retail team who has gotten everybody they could out from behind their desks. Walking up and down whatever Broadway, Main Street Valley Boulevard is relevant to their particular neighborhood, Eighth Avenue, Bowery, Canal Street or wherever else you might be and gotten people engaged one-on-one with the merchants and their communities with an outsized positive impact and 1 that actually is providing benefits. We look back at the cohort that we brought in, in the second and third quarter last year of those small business DDA customers and their balances are up. So normally, you see account attrition. First, your attrition can be higher than most years attrition. And so sometimes you don't see balanced growth year-over-year. In this case, we've seen significant balance growth from that same account, same cohorts year-over-year, which means not only did we get them to opening account, we have them to fund the account, we got them to use the account. And we've either pick the right merchants that are growing with us or they've just brought in more money from other places to make it even more impactful, all of which is great news for us and 1 that we're leaning into as best we can. Ladies first. Gentlemen.

Janet Lee from TD Cowen. All the organic RA build-out -- how do you think it takes to really get at scale? You're already existing hearing open customers that are using other plants like San Morgan Stanley and whoever. I know that it could be that getting the right time that filing on the web side, maybe about that. But at what point could be in this start to become for next year? Or is it more of a multiyear Build out question, you think about the time line?

Yes. So I think 2 layers to that question. One is, yes, it is challenging to find the right people with the right licenses the right background and the right language skills or other skills to be positively successful and impactful with our higher value add customers. And so we're being very careful about that selection process and about that onboarding process. But to your broader point, I think the reality is this is the opening innings of what could be a 30-year strategy for us of substantial growth. Today, Hong Kong has emerged as the world's largest offshore financial center. It is larger than Switzerland as an offshore financial center for asset manager assets, et cetera. And the reality is that some of that money will find its way to the United States. And when it does, we will be exceptionally well positioned along with some very large financial solutions that have presence in Asia as well, but we will be amongst those dozen or so that will position to capture some of that inward flow into the American markets, and we see that as a positive. Today, Hong Kong is 1 of the leading IPO markets by a number of IPOs, which means that there is a constant flow of business activity and capital that is being freed up into the international marketplace. And some of those companies will find reasons to move that capital and to invest the capital to direct operations. Otherwise, allow that capital to come to the American marketplace. And if it does, we will be uniquely positioned again amongst maybe a dozen folks that will be participating in that flow. And so when we look at the opportunity, -- it's not a -- let's hire a bunch of folks and see what we can do with it. It is how do we capitalize on this likely multi-decade positive flow of activity that will come from the maturation of the second largest economy in the world, and its transition to perhaps at some point in time, more ready capital flows or the flow of those capital into other investment opportunities, which we think the U.S. will feature prominently amongst because well, it has for every other global investor, so it probably will be here too. And so it's beginning of a very long journey, but 1 that we take great care in making sure we find the right people to help us build. We spent the better part of 2 years trying to find the right partnership to strike or buy and turn to the do it ourselves because we couldn't quite find that right partnership, and we'll be very careful, again, to build the franchise around the right people and the right processes to make sure we're doing it the right way, but also in a way that meets the needs of our most sophisticated clients today and the needs of what we expect to be a larger subset of clients in the future a much larger subset clients future.

Ryan Kenny with Morgan Stanley. You mentioned you like bonds. It's a good environment bonds 3% of NIM. Any changes that you're thinking about the securities portfolio strategy or willingness to take duration or use the HTM about which historically other than it's large for you guys, any change at all?

Now we are a high-quality liquid asset shop. I think we're 97% HQLA. I think we have more floaters than most, which has turned out to be a blessing. And I think we'll stay focused on the investment portfolio as a liquidity portfolio that sits there to help us maintain the credibility as 1 of the most liquid banks in the country, which we think is a very strong place to operate from.

Then as a follow-up to last conversation around the wealth business is that you're more building organically. And my sense is that historically, eases has been more transactional in nature, structure products, last on the advisory side. Is there a strategy to maybe build out different products like advisory and gain share there? It seems like you're doing more on the mortgage side, the future of that business is a lot higher?

Yes. Look, I think there are clients that I have met at the bank that I've been with the bank for over 40 years. So I don't know that transactional is the way I would never describe the relationship model East West. I think the reality is, as we've provided mortgages to folks who have actually much to my surprise, kept them and paid them off after a full 30 years, which other banks that never thought that was possible, but they do it East West. And so I don't see us as a transactional bank. On the wealth side, our capabilities since we didn't have an RIA before, we're limited to a brokerage model which was commissioned or transaction based, which is why we need we had to build out a different capability set so that our relationship clients could feel that we were operating consistent with them and either a fiduciary model or at least an advisory model that they felt comfortable with over the long haul, which is why we ultimately decided to create our own RIA and move to that fee-based model as opposed to the commission-based model. So I think this is a further deepening of East West through relationship orientation with our best clients in a way that we think will be very positively received.

I'll continue on. I guess the question I should ask is you talked about why you maintain high capital levels. Can you just talk about capital priorities. So that's a question I should ask you. The question I want to ask you is how could M&A and depository acquisitions be a part of that capital allocation?

Sure. And it's not that we haven't looked, and it's not that people have that sometimes come and knocked on Dominic store. It's just that we haven't filed the right opportunity that would allow us to leverage our capabilities more effectively in partnership with 1 of those opportunities that became present. So I think Dominic lacks the idea of being the exceptionally well-capitalized bank, helps him in his communications with colleagues, with customers. I think he also knows it affords them the flexibility to consider things at times, perhaps stressful fines, that others can't consider. And I think he puts a value in that optionality, perhaps a slightly higher rate than some others. And so he's prepared to carry that. I think there was a commentary from the gentleman here from $5 trillion bank this morning and he kind of made the same comment about Jamie Dimon's approach to capital. I think Dominic has observed that over the last 3 decades and has a similar view on some of those values to being prepared always being prepared for what you don't know. And I think Dominic knows well enough that he doesn't know everything. And he knows that I don't -- and therefore, he wants to be prepared for everything. And so whether it's stress testing or whether it's just having a little cushion, he feels more comfortable operating from that perspective. And -- over the long haul, he's built a business model that allows them to because it's more efficient because it's more focused because it's actually a simpler business model in many ways. It allows him to have this flexibility in a way that -- it's more difficult or challenging for others who have a higher cost structure or more complex product sets to compete with. And it's interesting that we're internationally active at the margin bank, but with a simpler business model, but the reality is we are -- we focus on limited set of geographies and limited product things that we do exceptionally efficiently and exceptionally well, and it's proven out over several decades.

So there are large banks up here today have credit card products have high relative service charges. Why is that not a part of East West growth strategy?

I think we have less than $1 million year-to-date of overdraft fees and a smallish number of service charges, in part because our customers generally maintain balances well in excess of any minimums that we ask them to maintain. And so we have the benefit of a fairly affluent client base at large, that is a saving-oriented client base. that maintains notable balances per account. So in addition to having perhaps more balances per branch, we can observe anecdotally that we also have more balances per customer than most banks. And that's an unmitigated good thing because that means there's fewer checks per customer. There's fewer ATMs per customer. There's fewer branch buses for a customer, and that means our cost to deliver to those customers. Relative to our balances, is lower, which translates into higher ROAs and ultimately, higher ROTCEs, which is why we deliver a 17% return on capital even when we maintain 10% tangible capital.

Any other questions? If not, I'll continue. Maybe a follow-up on Jared's question on , I think it was CD pricing. On the call, you talked about deposit costs have been well contained in the first couple of weeks of the fourth quarter that was several weeks ago, you made that comment. Care to provide an update fast forward through today.

They continue to be reasonably content.

Okay. I appreciate that. And then other banks up until recently, have been shrinking CRE -- how are you thinking about the commercial real estate business? You mentioned the concentration earlier in our conversation.

I think we've been focused on growing the other planks of our business, growing our C&I business, which has been fairly attractively growing several years and growing our single-family business. Right now, single-family growth is coming in stronger -- and when we see sort of some of the dynamics in the C&I book, what we recognize is twofold. One is we are continuing to grow our direct bilateral general business activities. But we're also seeing, as rates have moved higher, less and less of the NDFI or third-party lending or third-party leverage as a demand force driving balance growth. In fact, we've seen it being that negative. So mortgage warehouse lines as an example, people aren't drawing traditional 80% LTV mortgages at the rate they were, then there'll be less mortgages put on mortgage warehouse lines and NDFI mortgage credit will start to shrink. You've seen that across the board. And we have about $1 billion of such credit, and that's strong for us, too. If private equity looks to leverage its purchases and its activities and the cost of that leverage goes up, they pulled back from that activity, then the amount of incremental draws on capital call lines also comes down over time, and we've seen that happen as well. And if business credit funds are out of favor, and there's no new money going into new funds or less leverage being applied to those particular investments. So then business credit and DFI comes down broadly as well as everything else that's that leverage in it, and that is a shrink. And we see that happening across many NDFI portfolios. And our portfolios are not immune from that shrinkage. And so we're offsetting that by focusing on the core bilateral commercial things where we have the direct relationships and in the long run, that's the better place to focus for us to focus anyway.

Great. So with that, I think we'll wrap it up. Thank you, Chris. And thank you, East West Bank.

Thank you, Terry. Appreciate it.

Thank you.