No one envied the position regional banks like East West Bancorp of Pasadena, California, were in last year.
California was hit hard by the turmoil that roiled the banking industry in the spring. Three of the four banks that failed in March and April were headquartered in the Golden State. Another California institution, PacWest Bancorp in Los Angeles, reported a sharp drop in deposits in the first quarter, helping spur a decision to
Yet six months later, it seems East West — which reported fourth-quarter and full-year 2023 financial results Tuesday — has benefited handsomely from the disruption.
On a conference call with research analysts, Chairman and CEO Dominic Ng said the $69.6 billion-asset East West added 40,000 commercial and consumer deposit accounts in 2023, driving loan and deposit growth throughout the second half of the year. East West ended the year with loans of $51.5 billion, up 8% year over year and nearly 3% higher on a linked-quarter basis. Deposits also rose, though the increase was more modest. Year-end deposits of $56.1 billion were up 1.8% linked-quarter, but just 0.2% over the Dec. 31, 2022, total.
"We all saw what happened last year that a lot of our larger peers — well, two of them were gone and then some of the other peers are having some financial difficulty or transitioning and whatnot," Ng said on the conference call. "From a competitive landscape, I think it is marginally better for East West Bank."
At $239 million, East West's net income for the three months ending Dec. 31 fell 29% from a year earlier but included a $70 million Federal Deposit Insurance Corp. special assessment. Full-year revenue of $2.6 billion was a company record, while net income of $1.16 billion increased 2.9% from 2022.
David Chiaverini, who covers East West for Wedbush Securities, reiterated his "outperform" rating in a research note Wednesday, citing better-than-forecast deposit and loan growth. East West's strong capital position — it ended 2023 with a common equity Tier 1 capital ratio of 13.31% — helped set the company apart as "one of the few banks in our coverage buying back stock in the fourth quarter," Chiaverini added.
East West repurchased 1.5 million shares during the three months ending Dec. 31.
Compass Point's David Rochester reiterated his "buy" rating on East West. "Overall, we view the risk-reward in shares of EWBC as skewed to the upside," Rochester wrote Wednesday in a research note.
Credit quality added to East West's tailwinds in 2023 as nonperforming assets and net charge-off totals remained muted, while criticized asset levels declined. At $20 million, fourth-quarter net charge-offs were up 10% from the third quarter but amounted to just 15 basis points of average held-for-investment loans. At $978.2 million at year-end, criticized loans decreased 4% from Sept. 30.
"Asset quality remains strong, and we continue to proactively manage our credit risk," Ng said.
Like other banks, East West saw funding costs climb as clients sought higher deposit returns. East West expects the trend to carry over into 2024, prompting it to forecast a 4% to 6% decline in net interest income. The company also predicted noninterest expense growth in the 6% to 8% range. Both numbers exceeded expectations, a fact both Chiaverini and Rochester noted. "The guide was worse than expected, pointing to stronger expense growth and lower NII than we expected," Rochester wrote in his note.
Casey Haire, who covers East West for Jeffries, wrote Wednesday in a research note that loan pipelines "appear to be robust" but that they're filled with low-risk/low-return credits that won't help enough to prevent some margin compression in 2024. Chiaverini, for his part, cut his full-year 2024 earnings target by 40 cents to $7.75 but pointed to East West's "ability to accrete capital organically at a solid pace on a quarterly basis, and expectations for strong growth in tangible book value."
