Anticipated Loan Growth And Service Expansion Set To Diversify Portfolio And Boost Prospects

Key Takeaways

• Loan growth driven by C&I production and residential mortgages may diversify the portfolio and increase future revenue.
  
• Wealth management and forex services are likely to boost fee income and revenue, complementing share repurchase strategies enhancing shareholder value.
  
• Increased credit loss provisions and technology sector risks could negatively impact margins and earnings, while investment plans and interest rate changes add further financial pressures.

Catalysts

Operates as the bank holding company for East West Bank that provides a range of personal and commercial banking services to businesses and individuals in the United States.

• A substantial increase in loan growth is anticipated, driven by strong growth in Commercial & Industrial (C&I) production and continued strength in residential mortgages, which could diversify and balance the loan portfolio and positively impact future revenue.
  
• The launch of competitive new certificate of deposit rates for the Lunar New Year is expected to attract new money inflows and improve deposit retention, which could lower overall funding costs and boost net interest margins.
  
• The roll-off of negative carry swaps in early 2025 is expected to help alleviate negative hedge impacts, thus potentially improving net interest income and net interest margins.
  
• Continued emphasis on growing wealth management and foreign exchange services, which have been consistently yielding high growth, is likely to further boost fee income and overall revenue growth.
  
• An opportunistic share repurchase strategy, supported by strong capital ratios and a new $300 million repurchase authorization, is expected to enhance earnings per share, returning value to shareholders.

East West Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming East West Bancorp's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 48.9% today to 45.0% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $10.16) by about January 2028, up from $1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 12.2x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

East West Bancorp Future Earnings Per Share Growth

Risks

• The provision for credit losses increased significantly from the previous quarter, indicating potential issues with loan defaults, which could negatively impact net margins and earnings.
  
• The bank experienced net charge-offs from two problem credits in the technology sector, highlighting potential sector-specific risk which, if persistent, could affect revenue and profitability.
  
• While the company has had strong growth in deposits, the mention of the wildfires and the corresponding 32 impacted loans could pose future risks to asset quality and potential credit losses, potentially affecting net margins.
  
• The company plans significant investments in people and technology, which could increase operating expenses and affect net income if not offset by proportional revenue growth.
  
• Interest rate assumptions include two 25 basis point cuts in 2025, which could compress net interest margins if the interest rate environment evolves differently, potentially impacting the bank's earnings.

Valuation

• The analysts have a consensus price target of $116.83 for East West Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $128.0, and the most bearish reporting a price target of just $97.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.1 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $103.02, the analyst's price target of $116.83 is 11.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.