It has been about a month since the last earnings report for East West Bancorp (EWBC). Shares have lost about 1.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is East West Bancorp due for a breakout? 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 Beats Q3 Earnings Estimates on Higher Revenues
East West Bancorp’s third-quarter 2018 adjusted earnings per share of $1.17 surpassed the Zacks Consensus Estimate of $1.15. Further, the figure compared favorably with the prior-year quarter’s adjusted earnings of 91 cents per share.
Results primarily benefited from improvement in net interest income. Moreover, loans and deposit balances improved, which supported results to some extent. However, elevated expenses were the undermining factor.
Net income in the reported quarter was $171.3 million, up from $132.7 million in the prior-year quarter.
Revenues Improve, Costs Escalate
Net revenues were $395.2 million, increasing 12.1% year over year. However, the reported figure lagged the Zacks Consensus Estimate of $398.3 million.
Net interest income was $348.7 million, increasing 15% year over year. The rise was primarily driven by loan growth and expansion of loan yield, partially offset by increase in time deposit and rise in the cost of deposit.
Further, net interest margin expanded 24 basis points (bps) year over year to 3.76%.
Non-interest income amounted to $46.5 million, down 6% from the year-ago quarter. The decline was attributable to a fall in almost all components except letters of credit fees and foreign exchange income, ancillary loan fees and other income, wealth management fees, and net gains on sales of fixed assets.
Non-interest expenses increased 9.4% from the year-ago quarter to $179.8 million.
The efficiency ratio was 45.5%, down from 46.6% a year ago. Notably, fall in efficiency ratio indicates higher profitability.
Strong Balance Sheet
As of Sep 30, 2018, net loans were $30.9 billion, up 3.2% sequentially. Total deposits increased 2.6% from the end of the previous quarter to $33.6 billion.
Credit Quality Improves
Annualized net charge-offs were 0.05% of average loans held for investment, down from 0.06% at the end of the prior-year quarter. Further, in the reported quarter, the company registered provision for credit losses of $10.5 million, down from $13 million recorded in the prior-year quarter.
Also, as of Sep 30, 2018, total non-performing assets were $114.6 million, down 2% year over year.
Strong Capital & Profitability Ratios
Under the Basel III rules, common equity Tier 1 capital ratio was 12.3%, as of Sep 30, 2018, up from 11.4% at the end of the prior-year quarter. Total risk-based capital ratio was 13.8%, up from 12.9% witnessed in the year-ago quarter.
At the end of the reported quarter, return on average assets was 1.76%, increasing from 1.46% as of Sep 30, 2017. Further, as of Sep 30, 2018, return on average tangible equity was 18.50%, up from 16.30% a year ago.
Management projects loans to be up 10% year over year.
NIM (excluding the impact of the discount accretion) is expected to be 3.75%. Including the impact of the discount accretion, NIM is expected to be 3.80%.
Management expects non-interest expenses (excluding tax credit amortization & deposit premium amortization) to increase 9% year over year, down from the previous guidance of high single-digit rate.
Provision for credit losses is expected to be $60-$65 million, down from the earlier guidance of $70-$80 million.
Effective tax rate is expected to be 14%, up from prior expectation of 13%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, East West Bancorp has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
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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