East West Bancorp: Strong Growth at High Market Price (EWBC)

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East West Bancorp, Inc. (NASDAQ: EWBC) earnings are likely to rise this year, mainly due to the expected strong loan growth. In addition, the combination of a heavy variable rate loan portfolio and persistent deposit fees will increase net interest income in a rising interest rate environment. On the other hand, the provision charge will likely increase due to strong loan growth, which will limit the growth in net income. Overall, I expect the company to report earnings of $ 6.28 per share in 2022, compared to expected earnings of $ 6.16 per share in 2021. The year-end target price suggests a small drawback compared to the current market price. Accordingly, I take a neutral rating on East West Bancorp.

Loan growth is expected to continue to stay in the high single-digit range

East West Bancorp has seen high growth in single-digit loans in recent years. The company will most likely be successful in maintaining this historic trend in 2022 due to the strength of the economy. East West Bancorp is very well diversified geographically as it operates in California, Georgia, Massachusetts, Nevada, Texas, New York and Washington. As a result, the economic parameters for the whole country are a good indicator of the demand for loans. The strong improvement in the unemployment rate bodes well for consumer credit, while an expansionary PMI index bodes well for trade credit. The following charts show recent trends in these economic measures.

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In addition, management mentioned during the conference call that it was taking steps to continue to attract new customers. These measures include investments in people and technology and the expansion of product offerings. On the other hand, the upcoming cancellation of the remaining Paycheck Protection Program (“PPP”) loans will limit loan growth. According to the details given in the results presentation, outstanding PPP loans represented about 2.0% of total loans at the end of the last quarter.

Considering these factors, I expect lending to increase 8.2% in 2022. Meanwhile, deposits will likely increase along with lending. The following table shows my balance sheet estimates.

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Good combinations of loans and deposits to increase income in a tightening monetary situation

Unpaid deposits represented around 43% of total deposits at the end of September 2021. These deposits will make the average cost of deposits stick up in an environment of rising interest rates. On the other hand, variable rate loans represented around 65% of total loans at the end of the last quarter, as mentioned in the presentation. These loans will ensure that the average loan yield is revalued upward soon after an interest rate hike.

However, the overall asset mix is ​​not well positioned to benefit from higher rates. The loan-to-deposit ratio fell to 75% at the end of September 2021, from 84% at the end of December 2020 and 92% at the end of December 2019. As I expect deposits to increase in line with loans, the ratio is unlikely. loans / deposits are improving anytime soon. Due to the suboptimal asset mix, net interest income is only moderately sensitive to changes in rates. According to management’s interest rate sensitivity analysis, a 100 basis point increase in the interest rate can only increase net interest income by 3%. The following table of the 10-Q deposit shows the results of the interest rate sensitivity analysis.

Graphical user interface, Description table automatically generated

Considering the factors mentioned above, I expect the net interest margin to increase by only two basis points in 2022.

Loan growth to stimulate loan loss provisioning

East West Bancorp reported significant net provision reversals in the first nine months of 2021. Further reserve releases are likely as the level of provision is quite high relative to actual loan losses. Provisions represented 1.38% of total loans at the end of September 2021, while net write-offs represented only 0.13% of average loans in the third quarter of 2021, as mentioned in the presentation. As the allowances were more than 10 times the actual loan losses, they appear excessive.

In addition, East West Bancorp’s books are not much threatened by the Chinese economy and US-China relations. Exposure to China is limited as the region’s assets were only 3% of total consolidated assets at the end of the last quarter, as mentioned in the 10-Q case.

The growth in single-digit loans will likely be the main driver of provisioning this year. Overall, I expect provisioning to remain below the historical average in 2022. I expect provisioning expense to be 0.09% of total loans in 2022, compared to 0.19% of total loans from 2016 to 2019.

Expected earnings of $ 6.28 per share in 2022

Strong single-digit loan growth and a slight increase in margins will likely boost earnings this year. On the other hand, a higher provision charge will likely limit earnings growth. Overall, I expect the company to report earnings of $ 6.28 per share in 2022. For the last quarter of 2021, I expect the company to report earnings of 1.58 $ per share, which will bring annual earnings to $ 6.16 per share. . East West Bancorp is due to report fourth quarter results on January 27, 2022. The following table shows my income statement estimates.

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Actual profits may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic, particularly the Omicron variant.

Current market price above the target price for the coming year

East West Bancorp offers a dividend yield of only 1.5% at the current quarterly dividend rate of $ 0.33 per share. Earnings and dividend estimates suggest a payout rate of 21% for 2022, which is in line with the 2016-2019 average of 23%. Therefore, I do not expect an increase in the level of dividends, although there is a lot of room for a rise in dividends.

I use the historical price / earnings (“P / TB”) and price / earnings (“P / E”) multiples to value East West Bancorp. The stock has traded at an average P / TB ratio of 1.84 in the past, as shown below.

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Multiplying the average P / TB multiple by the tangible book value per forecast share of $ 42.7 yields a target price of $ 78.5 for the end of 2022. This price target implies a 9.6% drop. compared to the closing price on January 7. The following table shows the sensitivity of the target price to the P / TB ratio.

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The stock has traded at an average P / E ratio of around 12.3x in the past, as shown below.

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Multiplying the average P / E multiple by the expected earnings per share of $ 6.28 yields a target price of $ 77.1 for the end of 2022. This price target implies a decrease of 11.1% from at the January 7 closing price. The following table shows the sensitivity of the target price to the P / E ratio.

Description of the automatically generated table

The equal weighting of the target prices of the two valuation methods results in a combined target price of $ 77.8, which implies a decrease of 10.4% from the current market price. Adding the term dividend yield gives an expected total return of minus 8.8%. Therefore, I take a neutral rating on East West Bancorp, I want to buy this stock at a market price of at least 15% below the current level.


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