EAST WEST BANCORP INC Q2 FY2025 earnings call

• Strong second quarter results with record quarterly revenue and net interest income. Loan and deposit growth 2% quarter-over-quarter each. - Adjusted return on tangible common equity 16.7% and return on average assets 1.6%. - Asset quality resilient with criticized and nonperforming loans decreasing. - East West Bank ranked #1 Performing Bank above $50 billion in assets for third consecutive year. - Deposits: Total average deposits grew 2% QoQ, end-of-period up 3%, strong noninterest-bearing deposits growth. - Loans: Average loan balances up $940M QoQ, C&I lending largest contributor, residential mortgage demand durable, commercial real estate growth. - Net Interest Income: Grew to $617M, down interest-bearing deposit costs 67bps. - Fees: Total noninterest income $86M, fee income $81M, 6-month fee income up 14% Y/Y. - Expenses: Efficiency ratio 36.4%, total operating noninterest expense $230M. - Credit: Criticized and nonperforming loans decreased, net charge-offs 11bps, provision for credit losses $45M. - Capital: Tangible common equity 10%, regulatory capital ratios strong, shares repurchased.

Deposits: Total average deposits grew 2% quarter-over-quarter, with end-of-period deposits up 3%. Strong growth in noninterest-bearing deposits, and growth in interest-bearing checking, money market, and time deposit balances. Commercial, consumer, and business banking deposits all saw growth. Loans: Average loan balances up $940 million quarter-over-quarter. C&I lending was the largest contributor, with new originations across various industries. Residential mortgage demand was durable, and commercial real estate balances grew modestly. Net Interest Income: Grew to $617 million, up $17 million from Q1. Interest-bearing deposit costs decreased by 67 basis points. Fees: Total noninterest income was $86 million, with fee income $81 million. Over 6 months ended June 30, total fee income grew 14% compared to the first 6 months of the prior year. Expenses: Q2 efficiency ratio was 36.4%, total operating noninterest expense $230 million. Credit: Criticized and nonperforming loans decreased from the end of the first quarter. Net charge-offs were 11 basis points, and provision for credit losses was $45 million. Capital: Tangible common equity was approximately 10%, regulatory capital ratios well above requirements, and approximately 26,000 shares of common stock were repurchased.

• Full year end-of-period loan growth expected in the range of 4% to 6%, but net interest income and revenue trends expected above 7% for the full year. - Full year net charge-offs expected in the range between 15 basis points and 25 basis points. - Full year tax rate expected to be about 23%, and amortization of tax credits and CRA investment expense expected in the range of $70 million to $80 million.

• Deposit cost optimization challenges and managing deposit costs continuously. - Uncertainty around interest rate cuts and their impact on margin. - Potential impact of legislative changes on renewable energy tax credits. - Tariff uncertainty affecting business and fee income. - Credit risk related to economic outlook and specific asset classes like non-multifamily CRE.

Q: First question just be on the margin. You guys are doing a great job holding the line on loan yields. And then obviously, deposit beta pushing above 60%. Just wondering your ability to sustain both of them going forward.

A: Yes. So I think we're looking at deposit cost optimization on a continuous basis. And in fact, that will probably be a continued focus for us here in Q3, whether or not we get a rate cut or not in September. We think there's opportunity for us to do some more work on that front, and we'll continue to manage that. Obviously, we lowered our total deposit costs a few basis points this quarter, and we remain focused and diligent on that. On the asset repricing side, I think we continue to expect -- I think there's always a bit of a day count effect from the first or the second quarter in mortgages and mortgage-backed securities. But beyond that, I think we continue to expect that those fixed-rate asset classes will have an opportunity to reprice positively. So we're optimistic that we'll be able to maintain the margin within a range of [indiscernible] through the third quarter. And obviously, we'll see how and when rate cuts come after that.

Q: Can you talk about the impact of the recent legislative changes in the renewable energy tax credits business?

A: Sure. We're taking a look at the renewable energy investments that we make as well as the lending that we do. And obviously, that will have implications for the go forward. However, as we looked at all the projects we had already committed to and all the ones that were in flight, they seem to fall in under the exemption or under the period of grace until the new rules kick in. So as we sit here today, all of the existing investments and all our existing loan commitments are unimpacted. And we're rethinking about some of our go-forward tax credit investment strategies as we look down the road.

Q: Were you trying to finish something, Chris?

A: No, go ahead. Go ahead.

Q: Okay. So I guess, just going back to one on the NII side, the 7%-plus guidance it implies no growth relative to where we've been in the first half or the second quarter. I'm just wondering if we don't get rate cuts and you hit your loan growth outlook, shouldn't we assume NII generally to sort of drift higher and track loan growth. Is that sort of the right way to think about direction and pace of NII growth relative to loan growth?

A: Yes. So let me use the framework that you put forward. So yes, we are fundamentally asset sensitive. So yes, fewer rate cuts is better for us. And so the extent that rate cuts are slower, come later or of a lesser magnitude, we will do better. You're also correct, it's a function of loan growth and asset growth. And thankfully, we've had great deposit growth that's allowed us to continue to fund profitable loan growth. And to the extent that continues at a good pace, that could be better. And so those are the two key factors that could lead that to be better. I think, Ebrahim, I would say maybe slightly differently as well. I think we came out assuming this year that our NII growth would be in line with our overall asset or loan growth specifically in that 4% to 6% range. We raised that estimate when we went not from 4% to 6%, but the 6%-plus back in June. And I think we're reraising today as we go to 7%-plus. And to the extent rates are higher for longer or loan growth comes in better, there's still upside to that. And obviously, as Dominic would remind me, part of my task is to make sure we're putting our best foot forward and doing the best we can. And so we'll continue doing that every day.

Q: Maybe just on the deposit side, when we look at sort of the trends this quarter, it looks like average cost was higher than both end of period for first quarter and second quarter. Can you just sort of walk us through how that's moving and your thoughts on how that's going to move through the rest of the year?

A: Sorry, Jared. If I look at Table 8 -- or sorry, Table 6 press release, average total deposit costs were down 2 basis points. Total interest-bearing deposit costs were down 3 basis points. So on a quarter-over-quarter basis, I think we're moving in the right direction. And if I'm looking at Page 6 in our deck, I would note that the end of period interest-bearing deposit costs were down to 3.25%, which is a low point here relative to last quarter or prior period. So I think we're moving the deposit costs down.

Q: I appreciate your comments around SFR for the third quarter. I'm just wondering maybe looking out a little bit, some of the noise regarding the Trump presidency. Do you think that line item is at risk in the longer term with just some of the migration trends? Or is it isolated enough or insulated enough, I should say, that, that growth rate really shouldn't change all that much?

A: I think Irene pointed out to me a little over a year ago short after I joined that the American dream is alive and well, despite where rates are at, despite where sentiment is around anything else. And so the reality is we see ourselves providing a solution that supports that dream of American homeownership and that demand for the clients we serve is not slacking at all.

Q: A lot of questions were asked, but I just wanted to kind of follow up on the buyback. Chris, you had some comments on that in your prepared remarks, I think. The amount of buyback in the second quarter pretty light in terms of shares. And I'm wondering how much of that was simply being kind of cautious in the wake of kind of the tariff announcements because obviously, there was an opportunity to be repurchasing shares quite a bit lower than the stock is trading now.

A: Yes. I think part of that might just be timing, Gary, in the context of, I'll say that we -- the first couple of weeks of the quarter, which were the weeks immediately following Liberation Day, stock took a bit of a swoon. And we generally, since we prepare our financials, don't buy back when we're in possession of our results, and we haven't publicly disclosed them. And so there's sort of a bit of a blackout window that we self-impose just to be on the right side of any SEC questions later on. And so we weren't active in that period before the earnings call, and -- but the price action was there. And so when we sort of came back active, we set price expectations, not able to forget that there had been a seven handle at one point in the quarter. And of course, we never saw that handle again. So I think we just sort of went through the quarter a bit trying to keep up with the market movement and never quite got ahead of it. I think we'll be thoughtful about where we're headed as we look at the back half of the year and continue obviously to think that there's an appropriate level of repurchase. And obviously, we have the $241 million available to us at the right levels, but we'll continue to deploy it on an opportunistic basis.

Q: First one for me, just on the macro changes that you made with the CECL model. Can you just speak to some of the assumptions you made and how they changed, just to give us a sense for the conservatism that's built in around C&I, in particular?

A: So I think as Irene mentioned earlier in one of her responses, I think it was macro driven. And as we think about it, we didn't necessarily change the weighting assumptions about recessionary outlook versus the core outlook. But the Moody's model itself did have some degradation. And so we factored that degradation into our core and also factored into our other scenarios that we do run, and that contributed a good portion of the net change. We also took some specific looks at some of the C&I portfolios. And obviously, we're constantly evaluating those and essentially grading and risk rating those, and that was also part and parcel. But obviously, part of our risk rating takes into consideration the outlook. And so that's all baked in. Irene, would you care to add more to that? Irene Oh: No, I think that's a good summary. As a reminder, I think many people use the same kind of Moody's models, but we also use multi-scenarios. I wanted to just kind of factor that in as well. So that is part of maybe just the conservatism you alluded to.

Q: On the criticized migration in non-multifamily CRE, can you just speak to what asset classes within non-multifamily CRE drove that and kind of what the line of sight is in that area?

A: Good question. About half were special mention, half were substandard, pretty evenly distributed there as far as the income-producing CRE. From an asset class perspective, pretty broad-based as well. There were some loans that we downgraded because cash flow kind of short fall that we saw reductions for some properties that were impacted after the fires, but others kind of broad-based. As we look at these loans loan by loan and the underlying collateral, I would say, at this point, I don't see these moving to nonaccrual or something that will result in a charge-off at this point in time. But certainly, we're looking at the cash flows very carefully and ensuring that the grading is appropriate as well.

Q: Chris, a question for you on the balance sheet. Your mid-80s loan-to-deposit ratio, a lot of capital. Is there anything you want to do to the balance sheet over the next several quarters that maybe not have been done yet?

A: Well, I think we meet regularly with Irene and Dominic through the ALCO process, and we're always trying to optimize the balance sheet. I think we've made good strides towards that direction, but the reality is we know there's more on the deposits that can be optimized. And we know that there's a component of the investment portfolio that could be further optimized, and we continue to think about how we're going to grow the C&I book, in particular, so that's further optimized as a percentage of the total loans. And so those are all works in progress that we continue to sort of try and push in the right direction each day we come in.

Q: If I could just go back to some of the loan growth quickly. The single-family and C&I, Chris, your comments sounded pretty optimistic on kind of the third quarter setup. I'm curious just on the commercial real estate. Any selective kind of slowing of the growth potential in that business that you guys are seeing right now, just to either manage concentrations or maybe based on the competitive environment? Just hoping to unpack maybe a little bit of the CRE business.

A: Yes. I mean I think if I look at Page 7 of the press release, Table 2, you'll see that on a year-over-year basis, we've grown our single-family book by 5%, almost 6%, our C&I book by 5%, almost 6% and our CRE book by a little less than 2%. And so if I think about, hopefully, the comments that I've been making at the last several quarterly earnings calls and at the last several earnings presentations, it's a focus on continuing to grow the bank overall with a particular emphasis on growing our C&I and single-family in a balanced manner to get towards the 1/3, 1/3, 1/3 balance that Dominic has encouraged the bank to sort of shoot for in the medium to long term. And I think we're continuing to make progress on that quarter after quarter, year after year. And I think this is another good quarter of balanced growth in the way we'd like to see it.