East West Bancorp: Not Cheap Enough For Me Right Now (NASDAQ:EWBC)

Most of my emphasis on the banking sector over the previous yr has been on reasonably small establishments, with many ranging between a market capitalization of $200 million and $2 billion. One of many bigger gamers I’ve determined to have a look at, nevertheless, is East West Bancorp, Inc. (NASDAQ:EWBC). With a market capitalization of $8.6 billion as of this writing, it’s a behemoth in comparison with most of the others that I’ve analyzed. However in comparison with the banking sector extra broadly, it’s not all that enormous. Within the years main as much as the present fiscal yr, administration had achieved enticing progress on each the highest and backside traces. That progress has truly continued into 2023. On the identical time, nevertheless, there have been some indicators of weak spot. The financial institution has excessive quantities of uninsured deposit publicity, and the shares look dear on a e book worth foundation. When we add all of this up, I do imagine that the establishment makes for a greater ‘maintain’ than anything.

A large financial institution with a large price ticket

In line with the administration group at East West Bancorp, the establishment serves as a financial institution holding firm that was initially based again in 1998. Operationally talking, the agency has grown to have a bodily presence not solely within the US, but additionally all through elements of Asia. Between California, Texas, New York, Washington, Georgia, Massachusetts, Illinois, and Nevada, and locations like China and Singapore, it operates over 120 places. It’s value noting that solely 4 of its full-service branches and 5 consultant workplaces are abroad, so it could nonetheless be appropriate to say that the establishment is predominantly targeted on the U.S. market.

By these places, the corporate supplies a big selection of providers which can be conventional for the banking sector. It accepts deposits and lends these out within the type of loans. Examples embrace business and residential actual property lending, building financing, business enterprise lending, working capital traces of credit score, letters of credit score, asset-backed financing tasks, gear financing, mortgage syndication, and extra. Like every financial institution of any significant measurement, East West Bancorp has a web based presence that makes it simpler for its prospects to work together with it.

Over the previous few years, administration has succeeded in rising the corporate’s prime and backside traces. Increased rates of interest, mixed with a rising mortgage portfolio, made it attainable for the corporate to develop internet curiosity revenue from $1.17 billion in 2020 to $1.97 billion in 2022. Non-interest revenue has grown at a slower tempo from $235.5 million to $298.7 million. And over this identical window of time, internet income have virtually doubled from $567.8 million to $1.13 billion. That progress has continued into the present fiscal yr as nicely. Internet curiosity revenue jumped from $1.39 billion within the first nine months of final yr to $1.65 billion on the identical time this yr. Non-interest revenue has declined barely from $233.7 million to $215.4 million. However that hasn’t stopped internet revenue from rising from $791.3 million to $922.2 million.

As I discussed already, this was solely made attainable by a progress within the firm’s mortgage portfolio. The worth of loans shot up from $37.77 billion in 2020 to $47.61 billion in 2022. We have now seen that progress proceed all through this yr, with a studying of $50.25 billion as of the third quarter of 2023. As of late particularly, mortgage composition is extremely vital. Specifically, many buyers are apprehensive about exposure to workplace belongings. That is due to excessive emptiness charges in workplace properties throughout the nation. The excellent news is that solely about $2.29 billion, or 4.5% of the corporate’s whole mortgage portfolio, is within the type of workplace belongings. Nevertheless, I might argue that they in all probability are at an elevated threat of being inclined to excessive emptiness charges. 41% of those workplace belongings, by mortgage worth, are positioned in Los Angeles County. 8% are positioned in San Francisco, with one other 8% in different elements of the Bay Space. And lastly, 14% are positioned in different elements of Southern California. All mixed, 73% of workplace belongings by worth are positioned in California, with one other 2% attributable to elements of New York.

Different belongings on the corporate’s books have been reasonably unstable. Money and money equivalents, for example, have bounced in all places from a low level of $3.48 billion to a excessive level of $6.38 billion. As of the tip of the latest quarter, money and money equivalents totaled $4.56 billion. The establishment additionally had one other $9 billion value of assorted securities. And about two-thirds of these are categorized as out there on the market. I want I might say that debt ranges have been low. To be clear, relative to money and securities, to not point out loans, debt is just not precisely elevated. Nevertheless it has risen considerably in only a few quarters. On the finish of 2022, it got here in at $452.4 million. By the tip of the latest quarter, it was greater than 10 instances that at $4.65 billion.

In the case of deposits, the establishment has usually seen a rise over time. Complete deposits grew from $44.86 billion in 2020 to $55.97 billion in 2022. However in response to turmoil within the banking sector earlier this yr, deposits dropped to $54.74 billion by the tip of the primary quarter. We did see a pleasant uptick to $55.66 billion within the second quarter. However that was short-lived, with the worth of deposits falling $571.8 million within the third quarter to $55.09 billion. I do know that top rates of interest make it troublesome to maintain cash on the books. Nevertheless it’s not nice to see that sort of volatility throughout these instances. To make issues worse, whereas uninsured deposits have fallen from the 51% they have been on the finish of final yr, they’re nonetheless fairly excessive at 42% at the moment. That is nicely above the 30% most threshold that I are likely to desire.

It could be one factor if shares within the financial institution have been extremely low cost, however that is not actually the case. Relative to earnings, they’re very reasonably priced. Utilizing information from final yr, they’re buying and selling at 7.6 instances revenue. And primarily based on the information seen up to now for 2023, it is seemingly they might be even cheaper nonetheless. However on a price-to-book foundation, shares look reasonably lofty. The financial institution is presently buying and selling at a 31.6% premium to e book worth and at a 41.7% premium to tangible e book worth. If all the pieces else was trying constructive, I might be extra inclined to just accept that sort of premium. However on this house, yow will discover many banks which can be buying and selling at or beneath e book worth and, generally, tangible e book worth.

Takeaway

So far as banks go, East West Bancorp is a reasonably sizable participant with a big attain. Administration has finished nicely to develop income and income lately, with the expansion of belongings contributing tremendously to this. However there are some points. Shares look dear on a e book worth foundation. Uninsured deposit publicity is larger than I would really like it to be. Debt ranges have elevated materially, though they’re nonetheless manageable. As well as, there’s the latest volatility seen in deposits. Wanting on the complete image, I believe EWBC makes for a greater ‘maintain’ than a ‘purchase’ proper now.