Why Is East West Bancorp (EWBC) Up 8.5% Since Last Earnings Report?

A month has gone by since the last earnings report for East West Bancorp (EWBC). Shares have added about 8.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is East West Bancorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

East West Bancorp Q3 Earnings Miss, Revenues Improve Y/Y

East West Bancorp’s third-quarter 2019 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.

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 was $369.8 million, increasing 6% year over year. However, net interest margin 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%.

2019 Outlook

Management provided updated guidance on assumption of one more rate cut this year, probably at the end of October.

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

NIM (excluding the impact of the discount accretion) is projected to be 3.60-3.65%, lower than 3.60-3.70% mentioned previously. Discount accretion is estimated to add 2-3 bps to GAAP NIM.

Total loans are expected to be up 7% year over year (down from the previous guidance of 10% growth rate).

Non-interest expenses (excluding tax credit amortization and core deposit intangibles) are projected to increase 3%, slightly below the prior guidance of mid-single digits growth rate.

Provision for credit losses is estimated to be $100 million, up from prior guidance 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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, East West Bancorp has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, East West Bancorp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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