East West Bancorp is planning for the hit that lower interest rates will take on its asset-sensitive balance sheet, and Wall Street is betting that the bank's preparations will be enough to propel it to the other side of the headwinds.
The Pasadena, California-based company is dealing with the classic net interest margin pickle of a mismatch in the repricing of its loan yields and deposit prices.
Still, analysts were bullish on the bank's prospects after it beat expectations in its third-quarter results, announced Tuesday. The $74 billion-asset bank's stock price was up 7.1% Wednesday, trading at $96.80 by 1:30 p.m. Eastern time.
East West reported earnings per share of $2.16 in the third quarter, above analyst consensus estimates of $2.07.
East West, which focuses on the Asian American banking market, grew its total deposits 12% from a year prior to $61.7 billion, aided by a major Lunar New Year certificate of deposit campaign earlier this year. CD deposits made up about 38% of total deposits as of the end of the third quarter.
Chief Financial Officer Christopher Del Moral-Niles said on the company's earnings call that the bank has seen solid retention of those deposits, even as it's rolled down CD pricing by 100 basis points since the first quarter — double the Federal Reserve's 50 basis-point rate cut thus far.
The steady repricing will "continue to feed positively," the CFO said. "Our timing was: Bring them in early, roll down the curve as the Fed moves, and that seems to be working in our favor right now."
Still, the bank's elevated cost of deposits has cramped its net interest margin, which was 3.24% in the third quarter, compared with 3.48% in the third quarter of 2023.
Though East West is paying less interest to people who park their cash at the bank, tepid loan growth is leaving it to lean on its securities portfolio as a buttress for net interest income.
Loan growth has been "slower than we might have otherwise desired," per Del Moral-Niles. Increased income from both loans and the bank's securities portfolio helped deliver roughly flat year-over-year net interest income, at $573 million — well above the consensus analyst estimate of $560.4 million.
Due to the adverse trends on loan growth and deposit costs in 2024, the bank is projecting a full-year decline of 3%-4% in net interest income.
If the Fed continues to cut rates, as expected, it will drag on the revenue East West collects from loans, though balance sheet growth would offset some of the impact.
East West executives cautioned Wednesday that if the Fed rapidly slashes rates, the bank's asset yield will feel more pressure.
Chairman and CEO Dominic Ng said on the earnings call that the bank's capital level — its Common Equity Tier 1 ratio was 14.1% at the end of the third quarter — gives the bank flexibility, whether loan demand picks up rapidly or more sluggishly.
Brandon King, an analyst at Truist Securities, wrote in a note that East West's robust capital levels and long-term growth prospects make the stock "very attractive" despite the near-term revenue squeeze.
Citigroup analyst Ben Gerlinger wrote in a note that East West has a well-managed expense base, continued opportunities to reel in fee income — which totaled a record $81 million in the third quarter, up 21% from the previous year — and future net interest income tailwinds.
He wrote that East West is "a high-quality regional bank with a strong management team that is well-positioned for a higher-for-longer rate environment given its healthy capital ratios and lower credit risk than peer banks."
Ng said on the earnings call that the bank's fee income growth should be sustainable, highlighting its efforts to boost cash management and treasury management services.
