East West Bancorp, Inc. (EWBC) headquartered in California, is the fourth largest independent commercial bank, based on total assets. EWBC is also the largest bank in the United States that focuses on the financial services needs of businesses, which operate both in Asia and the United States, as well as having a strong focus on the Asian American community. Through its network of branches in the United States, China and Hong Kong, it provides a wide range of personal and commercial banking services to small- and medium-sized businesses, business executives, professionals, and other individuals. In addition, the company offers multilingual services to its customers in English, Cantonese, Mandarin, Vietnamese, and Spanish. It also offers a variety of deposit products, which includes the traditional range of personal, business checking and savings accounts, time deposits, and individual retirement accounts, travelers' checks, safe deposit boxes, and MasterCard (MA) and Visa (V) merchant deposit services.
The bank's lending activities include commercial, residential real estate, trade finance, and commercial business, including accounts receivable, small business administration (SBA), inventory, and working capital loans. It holds income-producing commercial real estate, and construction loan portfolios, but is not currently growing or actively lending in these portfolios. Typically, the company’s commercial borrowers are engaged in a wide variety of manufacturing, wholesale trade, and service businesses. More specifically, it provides commercial loans to small- and medium-sized businesses with annual revenues that generally range from $50 million to $500 million. In addition, the bank is focused on providing financing to clients needing a financial bridge that facilitates their business transactions between Asia and the United States.
East West concentrates on marketing its services primarily in the greater Los Angeles metropolitan area and the San Francisco Bay area. This happens to be a vital component to its short- and long-term growth prospects, since California is the eighth largest economy in the world, with a population of over 35 million people. What’s more, China and other Pacific Rim countries continue to grow as California's top trading partners. This provides the bank with an important competitive advantage, since it enables its customers to easily participate in the Asia Pacific marketplace. The bank is also committed to expanding its customer base in the rest of California and Asia, along with other urban areas in which it operates including: New York, Georgia, Massachusetts, and Texas.
Generally speaking, the banking and financial services industry in California tends to be highly competitive. The difficult operating environment is primarily a result of changes in laws and regulations, advancements in technology and product delivery systems, as well as continuing consolidation among financial services providers.
East West competes for loans, deposits, and customers with other commercial banks, and other financial services institutions. Some of these competitors are larger in total assets and capitalization, and offer a broader range of financial services than the bank, but the company relies heavily on its relationship with the rapidly expanding Asian-American community, which has served it well thus far.
Like most banks in this category, East West had been riding a steady wave of increasing profits, which, in turn, lifted the stock price to an all-time high (just above $40 a share) during the previous decade. However, the financial turmoil and subsequent sharp drop in the global equity markets in 2008 caused EWBC stock to plummet below $4 a share.
Since then, the bank has been on the road to recovery. Although interest rates continue to hover around historical lows, it has seen a jump in loan applications. Furthermore, declining interest rates have lessened East West’s own credit costs, spurring higher profits. Moreover, non-interest income has strengthened of late, while deposit costs and non-interest expenses have fallen some. What’s more, a healthier net interest margin should remain in effect going forward, helping results.
In addition, EWBC has taken measures to shore up its loan portfolio. It has realized solid growth in single-family home loans, which rose 9% during the first half of this year, to approximately two billion dollars. These fresh assets are subject to more-stringent underwriting requirements. In addition, East West Bancorp now mandates higher down payments and lower loan-to-value ratios. It has strived to further diversify the current loan mix by concentrating on commercial and trade finance debt deals, too. Looking ahead, credit metrics ought to heal slowly. A vast improvement in overall credit quality, coupled with a healthier economy, should provide EWBC with an opportunity to slash the provision for loan losses. Moreover, net charge-offs have plunged nearly 70% year over year, while nonperforming assets followed, falling to less than 1% of the total. These trends augur well for East West Bancorp’s bottom-line over the coming quarters.
It appears the bank’s efficient branch network has led to increased customer traffic. EWBC has been able to capitalize on a smaller, community-oriented layout, which has attracted more clients. This is because account holders seeking loans can obtain or refinance loan agreements in a much shorter time than typically available at larger competitors.
For a more detailed look at East West’s prospects and the investment merits of the stock, subscribers should study our full-page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.