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East West Bancorp (EWBC) Q3 Earnings Miss, Stock Down 5.1%

Zacks Equity Research

Shares of East West Bancorp EWBC tanked 5.1% following the release of third-quarter 2019 results. Earnings per share of $1.17 lagged the Zacks Consensus Estimate of $1.20. Nonetheless, the figure was on par with the prior-year quarter level.

While higher revenues, rise in loan and deposit balances, and fall in expenses supported the results, substantial increase in credit costs more than offset it. Additionally, lower interest rates acted as a headwind.

Moreover, management provided disappointing 2019 guidance on the back of the expectation of one more interest rate cut. Thus, the company’s share tanked 5.1% as the concerns weighed on investors’ sentiments.

Net income was $171.4 million, up marginally from the year-ago quarter.

Revenues Improve, Costs Down

Net revenues were $421.3 million, up 6.6% year over year. Also, the reported figure marginally beat the Zacks Consensus Estimate of $421.2 million.

Net interest income (NII) was $369.8 million, increasing 6% year over year. However, net interest margin (NIM) declined 17 basis points (bps) to 3.59%.

Non-interest income was $51.5 million, up 10.7% from the year-ago quarter. The rise was driven by increase in all fee income components except net gains on sales of fixed assets and lending fees.

Non-interest expenses declined 1.8% to $176.6 million. The fall was mainly due to decline in deposit insurance premiums and regulatory assessments cost, and amortization of tax credit and other investments expenses.

Efficiency ratio was 41.9%, down from 45.5% a year ago.  A fall in the efficiency ratio indicates improved profitability.

Loans & Deposits Increase

As of Sep 30, 2019, total loans held-for-investment were $33.7 billion, up 0.8% sequentially. Total deposits increased 0.5% from the end of the previous quarter to $36.7 billion.

Credit Quality Worsens

Annualized net charge-offs were 0.26% of average loans held for investment, up from 0.05% at the end of the prior-year quarter.

Further, as of Sep 30, 2019, non-PCI non-performing assets were $134.5 million, up 17.3%. Also, provision for credit losses were $38.3 million, up significantly from $10.5 million in the prior-year quarter.

Capital Ratios Improve, Profitability Ratios Deteriorate

Common equity Tier 1 capital ratio was 12.8% as of Sep 30, 2019, up from 12.3% in the prior-year quarter. Total risk-based capital ratio was 14.2%, up from 13.8%.

At the end of the quarter, return on average assets was 1.58%, down from 1.76% as of Sep 30, 2018. Further, as of Sep 30, 2019, return on average tangible equity was 15.7%, down from 18.5%.

Dismal 2019 Outlook

Management provided 2019 guidance on assumption of one more rate cut later this month.

Total loans are expected to be up 7% year over year, down from prior guidance of 10% growth.

NII (excluding the impact of discount accretion) is projected to increase 6%, down from prior guidance of high-single digit growth rate.

NIM (excluding impact of the discount accretion) is projected to be 3.60-3.65%, lower than 3.60-3.70% expected previously.

Non-interest expenses (excluding tax credit amortization & core deposit intangibles) are expected to rise 3%, lower than the prior expectation of increase in mid-single digits rate.

Provision for credit losses is estimated to be $100 million, up from previous range of $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.

East West Bancorp, Inc. Price, Consensus and EPS Surprise

 

East West Bancorp, Inc. Price, Consensus and EPS Surprise

East West Bancorp, Inc. price-consensus-eps-surprise-chart | East West Bancorp, Inc. Quote

Currently, East West Bancorp carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Washington Federal’s WAFD fourth-quarter fiscal 2019 (ended Sep 30) earnings came in at 66 cents per share, in line with the Zacks Consensus Estimate. The figure also reflects year-over-year growth of 6.5%.

Hancock Whitney Corporation’s HWC third-quarter 2019 adjusted earnings per share of $1.03 beat the Zacks Consensus Estimate of $1.01. The bottom line comes in 2% higher than the year-ago quarter’s reported figure.

Commerce Bancshares, Inc.’s CBSH third-quarter 2019 earnings per share of 98 cents surpassed the Zacks Consensus Estimate of 93 cents. The figure was in line with the prior-year quarter.

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