Could East West Bancorp Be a Core Regional Bank Holding?

East West Bancorp (EWBC) – Motley Fool Scoreboard Analysis

Key Concepts:

• Moneyball Database: A database used by The Motley Fool to identify potentially undervalued stocks.
• Net Interest Margin (NIM): The difference between the revenue a bank generates from interest on its loans and the amount it pays out in interest on deposits.
• Non-Interest-Bearing Deposits: Deposits held by a bank that do not accrue interest, representing a low-cost funding source.
• Book Value: The net asset value of a company, calculated as total assets minus total liabilities.
• Net Charge-Off Ratio: A ratio that measures the percentage of loans a bank has written off as uncollectible.
• Succession Planning: The process of identifying and developing future leaders within an organization.

Business Strength (Rating: 7.8/10 – Lou: 8, Matt: 7)

East West Bancorp (EWBC) operates 110 locations across the US and Asia, uniquely holding a full banking license in China. Its core strategy centers around serving the Chinese American community, a niche largely overlooked by other banks. While Matt Frankel expressed some reservations about the geographic distribution, acknowledging a preference for Sun Belt regional banks, both analysts recognized the strength of focusing on this specific demographic.

Lou Whiteman highlighted the bank’s proactive approach to building loan loss reserves in Q3, a step many other banks didn’t take. Despite this, EWBC maintains an exceptionally low net charge-off ratio, indicating strong asset quality. The bank’s success is attributed to identifying and capitalizing on a need within the Chinese American community, transforming from a small savings and loan in Los Angeles to a substantial financial institution.

Management (Rating: 9/10 – Lou: 9, Matt: 9)

Dominic Ng, the bank’s CEO, has been with East West Bancorp since 1991, overseeing its growth from $600 million to $80 billion in assets. Both analysts lauded his performance, with Matt Frankel stating, “Can’t really argue with that performance.”

While acknowledging the need for succession planning given Ng’s age (66), both analysts gave the management a score of nine, citing Ng’s continued strong leadership and the difficulty in envisioning his departure. Lou Whiteman admitted a slight hesitation due to succession concerns but ultimately acknowledged Ng’s exceptional track record.

Financials (Rating: 8/10 – Lou: 8, Matt: 8)

EWBC demonstrated robust financial performance. Assets increased by 7% year-over-year, loans by 5%, and deposits by 8% – the highest growth rates among the three banks recently reviewed (Bank OZK and US Bank). The bank also boasts solid net interest margins and significant growth in fee income, particularly from wealth management, loan fees, and foreign exchange.

Lou Whiteman emphasized the importance of the bank’s high volume of non-interest-bearing deposits, a direct result of its strong community relationships. This allows EWBC to avoid paying the higher interest rates offered by competitors to attract deposits, improving its bottom line. A minor concern raised by Lou was the relatively low dividend yield of 2% compared to other banks.

Valuation & Future Outlook (Rating: 7.8/10 Overall)

Lou Whiteman anticipates East West Bancorp will outperform the market, projecting a 10-15% return over the next five years, likely closer to 10%. He assessed the stock’s safety at a seven, acknowledging inherent banking risks but highlighting the bank’s strong core business and customer relationships. The stock is currently valued at 1.6 times book value, which is considered reasonable but doesn’t offer the same potential upside as some other banking stocks.

Matt Frankel concurred with a mildly market-beating outlook and a safety score of seven, attributing this to the bank’s stronger recent growth and loyal customer base. He noted the favorable environment for banking in general.

Notable Quotes:

• Matt Frankel: “One of my favorite things in the banking industry is when a company finds its niche and just executes on it.”
• Lou Whiteman: “The power of building a relationship with a community is it's not price-sensitive. You're not fast money.”
• Anand Chokkavelu: “ChatGPT will just tell you what you want to hear. It's like a good analyst.” (This was a closing remark, seemingly a humorous observation about the nature of analysis.)

Logical Connections:

The analysis progresses logically from assessing the fundamental strength of the business to evaluating management, financial performance, and ultimately, valuation. The discussion consistently links EWBC’s success back to its niche focus on the Chinese American community, demonstrating how this strategy drives financial performance and fosters customer loyalty. The financial analysis builds upon the business strength assessment, explaining how strong growth in assets, loans, and deposits translates into positive financial results.

Conclusion:

East West Bancorp is presented as a well-managed, financially sound bank with a strong niche focus. While not as undervalued as some other banking opportunities, it is projected to outperform the market due to its loyal customer base, strong financial performance, and effective management. The overall score of 7.8/10 suggests a solid investment opportunity, though not a “sure thing” requiring immediate purchase. Matt Frankel prefers Ally as a top pick, while Lou Whiteman favors Live Oak Bank, indicating alternative options within the banking sector.