EWBC - East West Bancorp: Not Cheap Enough For Me Right Now

2023-12-07 17:43:03 ET

Summary

• East West Bancorp is a large player in the banking sector with a market capitalization of $8.6 billion.
• The company has achieved attractive growth in both top and bottom lines, but there are signs of weakness.
• High levels of uninsured deposit exposure and pricey shares on a book value basis suggest that the stock is better suited as a hold rather than a buy.

Most of my emphasis on the banking sector over the past year has been on rather small institutions, with many ranging between a market capitalization of $200 million and $2 billion. One of the larger players I have decided to look at, however, is East West Bancorp, Inc. ( EWBC ). With a market capitalization of $8.6 billion as of this writing, it is a behemoth compared to many of the others that I have analyzed. But compared to the banking sector more broadly, it is not all that large. In the years leading up to the current fiscal year, management had achieved attractive growth on both the top and bottom lines. That growth has actually continued into 2023. At the same time, however, there have been some signs of weakness. The bank has high amounts of uninsured deposit exposure, and the shares look pricey on a book value basis. When we add all of this up, I do believe that the institution makes for a better 'hold' than anything else.

A sizable bank with a sizable price tag

According to the management team at East West Bancorp, the institution serves as a bank holding company that was originally founded back in 1998. Operationally speaking, the firm has grown to have a physical presence not only in the US, but also throughout parts of Asia. Between California, Texas, New York, Washington, Georgia, Massachusetts, Illinois, and Nevada, and places like China and Singapore, it operates over 120 locations. It is worth noting that only four of its full-service branches and five representative offices are overseas, so it would still be correct to say that the institution is predominantly focused on the U.S. market.

Through these locations, the company provides a wide array of services that are traditional for the banking sector. It accepts deposits and lends those out in the form of loans. Examples include commercial and residential real estate lending, construction financing, commercial business lending, working capital lines of credit, letters of credit, asset-backed financing projects, equipment financing, loan syndication, and more. Like any bank of any meaningful size, East West Bancorp has an online presence that makes it easier for its customers to interact with it.

Over the past few years, management has succeeded in growing the company's top and bottom lines. Higher interest rates, combined with a growing loan portfolio, made it possible for the company to grow net interest income from $1.17 billion in 2020 to $1.97 billion in 2022. Non-interest income has grown at a slower pace from $235.5 million to $298.7 million. And over this same window of time, net profits have almost doubled from $567.8 million to $1.13 billion. That growth has continued into the current fiscal year as well. Net interest income jumped from $1.39 billion in the first nine months of last year to $1.65 billion at the same time this year. Non-interest income has declined slightly from $233.7 million to $215.4 million. But that hasn't stopped net income from growing from $791.3 million to $922.2 million.

As I mentioned already, this was only made possible by a growth in the company's loan portfolio. The value of loans shot up from $37.77 billion in 2020 to $47.61 billion in 2022. We have seen that growth continue throughout this year, with a reading of $50.25 billion as of the third quarter of 2023. These days especially, loan composition is incredibly important. In particular, many investors are worried about exposure to office assets. This is because of high vacancy rates in office properties across the country. The good news is that only about $2.29 billion, or 4.5% of the company's total loan portfolio, is in the form of office assets. However, I would argue that they probably are at an elevated risk of being susceptible to high vacancy rates. 41% of these office assets, by loan value, are located in Los Angeles County. 8% are located in San Francisco, with another 8% in other parts of the Bay Area. And lastly, 14% are located in other parts of Southern California. All combined, 73% of office assets by value are located in California, with another 2% attributable to parts of New York.

Other assets on the company's books have been rather volatile. Cash and cash equivalents, for instance, have bounced all over the place from a low point of $3.48 billion to a high point of $6.38 billion. As of the end of the most recent quarter, cash and cash equivalents totaled $4.56 billion. The institution also had another $9 billion worth of various securities. And about two-thirds of those are classified as available for sale. I wish I could say that debt levels were low. To be clear, relative to cash and securities, not to mention loans, debt is not exactly elevated. But it has risen significantly in just a few quarters. At the end of 2022, it came in at $452.4 million. By the end of the most recent quarter, it was more than 10 times that at $4.65 billion.

When it comes to deposits, the institution has generally seen an increase over time. Total deposits grew from $44.86 billion in 2020 to $55.97 billion in 2022. But in response to turmoil in the banking sector earlier this year, deposits dropped to $54.74 billion by the end of the first quarter. We did see a nice uptick to $55.66 billion in the second quarter. But that was short-lived, with the value of deposits falling $571.8 million in the third quarter to $55.09 billion. I know that high interest rates make it difficult to keep money on the books. But it's not great to see that kind of volatility during these times. To make matters worse, while uninsured deposits have fallen from the 51% they were at the end of last year, they are still quite high at 42% today. That's well above the 30% maximum threshold that I tend to prefer.

It would be one thing if shares in the bank were incredibly cheap, but that isn't really the case. Relative to earnings, they are very affordable. Using data from last year, they are trading at 7.6 times profit. And based on the data seen so far for 2023, it's likely they would be even cheaper still. But on a price-to-book basis, shares look rather lofty. The bank is currently trading at a 31.6% premium to book value and at a 41.7% premium to tangible book value. If everything else was looking positive, I would be more inclined to accept that kind of premium. But in this space, you can find many banks that are trading at or below book value and, sometimes, tangible book value.

Takeaway

As far as banks go, East West Bancorp is a fairly sizable player with a large reach. Management has done well to grow revenue and profits in recent years, with the growth of assets contributing greatly to this. But there are some issues. Shares look pricey on a book value basis. Uninsured deposit exposure is higher than I would like it to be. Debt levels have increased materially, even though they are still manageable. In addition, there is the recent volatility seen in deposits. Looking at the whole picture, I think EWBC makes for a better 'hold' than a 'buy' right now.

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