East West Bancorp (EWBC) has a unique focus on Chinese-American communities. Most of the bank’s 130 branches are in California where it makes 65%-75% of its loans depending on category. It also has branches in Texas, New York, Washington, Georgia, Massachusetts, and Nevada, notes Doug Gerlach, editor of Investor Advisory Service.
It serves its customers by maintaining bi-lingual personnel in the branches and embedding itself in the communities where they live, work, and build businesses. East West also provides a banking connection to mainland China and Hong Kong, but this business represents a manageable 6% of its assets.
As was the case with many banks, East West Bancorp suffered mightily in the recession. But he East West of today bears little resemblance to the East West of 2008-2009. It has a much more diversified balance sheet with land and construction loans down to 2% of the loan portfolio compared to 17% at the peak.
There is no longer a mention of “interest only” or “no doc” mortgages. The average mortgage loan-to-value is about 50%. An impressive 28% of East West’s total deposits do not pay interest.
This helps it generate a strong 3.76% net interest margin (NIM). It is well insulated from rising interest rates as 92% of loans have some sort of variable interest rate; only 8% are fixed rate loans.
While deposit costs may start rising faster than loan yields, East West’s NIM outlook is among the most favorable we’ve seen. Its balance sheet is also relatively clean with borrowed money comprising less than 2% of total liabilities (the remaining 98% being deposits).
CEO Dominic Ng has been an executive and director of East West Bancorp since 1992 and at age 59 could continue for many more years. He is involved in numerous business, cultural, and philanthropic organizations in California.
Averaging 14.1% over the past five years, East West Bancorp’s return on equity is relatively high for a bank. This allows it to pay a dividend and still produce fairly attractive growth. We believe that it can grow earnings at least 10% annually.
This could result in EPS as high as $6.59. A repeat of the average high P/E ratio of 17.1 could produce a stock price approaching 113. The potential total return exceeds 16% annually. The downside risk to its share price is 14% to 48, its recent low price from 2017.
