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A month has gone by since the last earnings report for East West Bancorp (EWBC). Shares have added about 11.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is East West Bancorp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
East West Bancorp Q3 Earnings Beat Estimates, Provisions Down
East West Bancorp’s third-quarter 2020 earnings per share of $1.12 surpassed the Zacks Consensus Estimate of 94 cents. However, the figure is down 4.3% from the prior-year quarter.
The results reflect lower provisions and operating expenses. Further, improving loan and deposit balances strengthen the balance sheet. However, lower net interest and non-interest income, and shrinking margins remain headwinds.
Net income was $159.5 million, down 6.9% from the year-ago quarter.
Revenues Drop, Expenses Down
Total revenues were $373.7 million, down 11.3% year over year. Moreover, the figure missed the Zacks Consensus Estimate of $398 million.
NII came in at $324.1 million, which fell 12.4% year over year. NIM also contracted 87 basis points year over year to 2.72%.
Non-interest income was $49.6 million, down 3.7% from the year-ago quarter. This decline mainly resulted from a decrease in net gains on sale of loans, foreign-exchange income and other investment income. The downside was partially offset by an increase in lending fees, deposit account fees and other income.
Non-interest expenses declined 5.1% from the prior-year quarter to $167.7 million. The fall was largely due to lower amortization, occupancy and legal expenses.
Efficiency ratio was 44.86%, up from the prior year’s 41.93%. A rise in the efficiency ratio indicates deterioration in profitability.
Loans & Deposits Increase
As of Sep 30, 2020, net loans were $36.8 billion, up marginally sequentially. Total deposits increased 2.5% from the end of the first quarter to $41.7 billion.
Credit Quality: A Mixed Bag
Annualized quarterly net charge-offs were 0.26% of average loans held for investment, unchanged from the end of the prior-year quarter.
As of Sep 30, 2020, non-performing assets were $260 million, surging 93.2% year over year. However, provision for credit losses was $10 million, tanking 73.9% from the prior-year quarter’s $38.3 million.
Capital Ratios Improve, Profitability Ratios Deteriorate
Common equity Tier 1 capital ratio was 12.8% as of Sep 30, 2020, unchanged from Sep 30, 2019. Total risk-based capital ratio was 14.5%, up from 14.2% as of the same date.
At the end of the third quarter, return on average assets was 1.26%, down from 1.58% as of Sep 30, 2019. Further, as of Sep 30, 2020, return on average tangible equity was 13.88%, down from the 15.75% witnessed in the corresponding period of 2019.
Fourth Quarter Outlook
The company expects GAAP NII to grow 3-5%. Further, GAAP NIM is expected to be in the range of 275 to 285, including Paycheck Protection Program (PPP) income. Both NII and NIM are expected to be driven by a fall in deposit costs and the partial repayment of Paycheck Protection Program Liquidity Facility (PPPLF) ahead of PPP loan forgiveness.
Amortization of tax credit and other investments is anticipated to be nearly $20 million.
Further, the company expects to recognize a deferred fee and interest income of $15 million from PPP loans.
The company projects similar pace of residential mortgage origination as witnessed in the first three quarters of 2020.
Effective tax rate is likely to be close to the full year rate of 15%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
At this time, East West Bancorp has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. 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 C. 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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