East West Bancorp (EWBC) Rides on Rates, Weak Asset Quality Ails

East West Bancorp EWBC remains well-poised for growth on decent loan balances and higher interest rates. However, elevated operating expenses and deteriorating credit quality are concerns.

East West Bancorp is focused on improving revenues. Its primary source of revenues, net interest income (NII), witnessed a CAGR of 11.5% over the last six years (2017-2022), mainly driven by a rise in loan balances. The decent demand for loans and higher interest rates are expected to keep supporting NII. We project the company's NII to witness a CAGR of 4.6% by 2025. Management expects NII to increase 12-15% in 2023.

With the Federal Reserve expected to keep interest rates high in the near term, EWBC's net interest margin (NIM) is anticipated to improve in the quarters ahead, while rising funding costs might weigh on it. In 2022, NIM witnessed a year-over-year rise to 3.45%, with the uptrend continuing in the first nine months of 2023. Per our estimates, NIM will increase to 3.60% in 2023.

East West Bancorp’s capital distribution activities seem impressive. In January 2023, the company hiked its quarterly dividend by 20%. The company also has a share repurchase plan in place. As of Sep 30, 2023, $254 million remained available under the buyback authorization. After pausing buybacks for more than a year, EWBC intends to resume the same in the fourth quarter of 2023. Given a solid capital position and earnings strength, the company’s capital distribution plan looks sustainable.

In the past six months, shares of this Zacks Rank #3 (Hold) company have jumped 24.5%, outperforming the industry's 15.1% rally.
 

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Weakening credit quality is a major headwind for EWBC. Provision for credit losses has witnessed a CAGR of 9.7% over the five years ended 2022, with the uptrend continuing in the first nine months of 2023. We expect to see a similar rise in the coming quarters on a deteriorating macroeconomic outlook. Per our estimates, provision for credit losses will witness a CAGR of 31.2% in the three years ended 2025.

However, EWBC continues to record a rise in non-interest expenses over the past several years. The metric has recorded a CAGR of 5.4% over the last five years (2017-2022). The increase was mainly due to a rise in compensation and employee benefit costs. Expenses are expected to remain elevated due to an increase in headcount, inflationary pressure and investments in technology to improve non-interest income. Per our estimates, total non-interest expenses will rise 16.9% in 2023, 6.4% in 2024 and 3.8% in 2025.

Banks Worth a Look

A couple of top-ranked stocks from the banking space are WSFS Financial Corporation WSFS and Byline Bancorp BY.

Earnings estimates for WSFS have remained unchanged for 2023 over the past 30 days at $4.47. The company’s shares have gained 2.5% over the past six months. WSFS Financial currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Byline Bancorp’s earnings estimates have moved 1.4% north for the current year at $2.83 over the past 30 days. In six months’ time, BY’s shares have gained 11.2%. The company carries a Zacks Rank #2 at present.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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