East West Bancorp (EWBC) Q2 Earnings Match, Stock Up 5.2%

Shares of East West Bancorp (NASDAQ:EWBC) rose 5.2% following the release of second-quarter 2019 results. Adjusted earnings per share of $1.24 were in line with the Zacks Consensus Estimate. Also, the figure was up 5.1% from the prior-year quarter.

Increase in revenues, and continuous improvement in loans and deposits drove the results. However, higher provisions for credit losses and slight rise in expenses were on the downside.

Net income was $150.4 million, down 12.7% from the prior-year quarter.

Revenues Improve, Costs Up Modestly

Net revenues were $420.1 million, up 7.7% year over year. Also, the reported figure beat the Zacks Consensus Estimate of $416.4 million.

Net interest income (NII) was $367.3 million, increasing 7.5% year over year. However, net interest margin (NIM) declined 10 basis points (bps) to 3.73%.

Non-interest income was $52.8 million, up 9.3% from the year-ago quarter. The rise was largely driven by net gains on sales of AFS investment securities, and interest rate contracts and other derivative income.

Non-interest expenses inched up slightly to $177.7 million. Higher compensation and employee benefits, deposit-related expenses, computer software expenses and other operating expenses were mostly offset by decline in Deposit insurance premiums and regulatory assessments cost and consulting expenses.

Efficiency ratio was 42.3%, down from 45.5% a year ago. A fall in the efficiency ratio indicates improved profitability.

Loans & Deposits Increase

As of Jun 30, 2019, total loans held-for-investment were $33.4 billion, up 2.6% sequentially. Total deposits increased marginally from the end of the previous quarter to $36.5 billion.

Credit Quality: Mixed Bag

Annualized net charge-offs were 0.09% of average loans held for investment, down from 0.14% at the end of the prior-year quarter.

However, as of Jun 30, 2019, non-PCI non-performing assets were $119.3 million, up 15.3%. Also, provision for credit losses were $19.2 million, up 23.9% from the prior-year quarter.

Capital Ratios Improve, Profitability Ratios Deteriorate

Common equity Tier 1 capital ratio was 12.5% as of Jun 30, 2019, up from 12.2% in the prior-year quarter. Total risk-based capital ratio was 13.9%, up from 13.7% reported a year ago.

At the end of the quarter, return on average assets was 1.45%, down from 1.84% as of Jun 30, 2018. Further, as of Jun 30, 2019, return on average tangible equity was 14.5%, down from 19.5% reported a year ago.

Dismal 2019 Outlook

Management provided 2019 guidance on assumption of two rate cuts this year.

Total loans are expected to be up 10% year over year.

NII (excluding the impact of discount accretion) is projected to increase in high single digit, down from prior guidance of low double digits growth rate.

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NIM (excluding impact of the discount accretion) is projected to be 3.60-3.70%, lower than 3.75-3.80% expected previously.

Non-interest expenses (excluding tax credit amortization & core deposit intangibles) are expected to rise in mid-single digits.

Provision for credit losses is estimated to be $80-$90 million.

Effective tax rate is anticipated to be 20%, including the impact of the $30.1 million reversal of previously claimed tax credits in the second quarter of 2019 or nearly 15% excluding the tax credit reversal.

Our Take

East West Bancorp remains well positioned for revenue growth, given the steady improvement in loan and deposit balances as well as efforts to improve fee income. However, persistently rising credit costs and lower rates are major concerns.