East West Bancorp (EWBC), rides on high rates as asset quality deteriorates
East West Bancorp, Inc.’s EWBC organic growth strategy remains impressive on higher loan demand and rising rates. The company’s capital deployment activities reflect a strong balance sheet and liquidity position. The company’s capital deployment activities remain vulnerable to deteriorating asset quality, rising operating costs, and other short-term challenges.
East West Bancorp’s net interest income (NII), which is the primary source of its revenues, witnessed a CAGR of 5.8% over the last five years (2017-2021). The CAGR for total loans was 9.5%, while deposits experienced a CAGR at 14%. NII is expected to continue benefiting from the continuing rise in demand for loans, higher interest rates and modest economic growth. We expect NII to grow at 16.4% in the next three years. The same is true for deposits and loans, which are expected to grow at 6.4% and 1.8% respectively, over the same period.
Also, the rising rate environment and steady rise in loan demand are expected to support EWBC’s net interest margin (NIM). NIM saw a year-overyear increase in the first nine months 2022. We expect the metric to rise to 3.38%, 3.81, and 3.77% in 2022 and 2023, respectively.
Like East West Bancorp there are many other banks including Hancock Whitney Corp HWC BankUnited, Inc. BKU are expected to see an increase in NIM. HWC management anticipates that every 25 basis point (bps) increase of the Fed Funds Rate will increase its NIM by 2-3bps. However, for BKU, NIM will increase due to higher rates.
East West Bancorp is able to maintain a strong balance sheet. This makes the company’s capital deployments sustainable. The company raised its quarterly dividend 21% in January 2022. The company also has an share repurchase plan. 254 million was still available to the company as per the buyback authorization that was announced in March 2020.
Shares of this Zacks Rank #3 (Hold) company have lost 3.8% in the past six months compared with the industry’s decline of 14.9%. See the full report. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research
However, East West Bancorp’s worsening asset quality is a headwind. Over the last four years, credit loss provision saw a 65.7% CAGR. The uptrend continued in the first nine month of 2022. Management expects that the provision for credit loss in 2022 will be $80 million. The same amount will be $79.7million for 2022. Year-over-year increases are 83.2% in 2023 and 11.3% 2024.
EWBC also has seen an increase in expenses. While expenses decreased in 2020, there was a 4.5% CAGR over the five years 2017-2021. The increase in headcount, inflationary pressure, and investments in technology to improve non-interest income are all expected to continue to drive up overall costs. We predict a CAGR in total non-interest expense of 8.7% over three years.
Get the most recent Zacks Investment Research recommendations. Download 7 Best Stocks in the Next 30 Days Today Click to get this free report
BankUnited, Inc. (BKU) : Free Stock Analysis Report
East West Bancorp, Inc. (EWBC) : Free Stock Analysis Report
Hancock Whitney Corporation (HWC) : Free Stock Analysis Report