Banking On Success Thriving In Lending And Fee Growth With Strong Capital Strategies

Key Takeaways

• Anticipated growth in mortgage and C&I lending, and deposit strategy could boost future earnings and net interest income.
  
• Fee income growth and capital strategies may enhance shareholder returns and earnings per share.
  
• Reliance on non-interest income growth and loan drawdowns, amid market volatility and potential rate cuts, poses earnings and liquidity risks.

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.

• East West Bancorp anticipates continued growth in residential mortgage lending and strong pipeline levels going into the fourth quarter, which could positively impact future revenues and earnings.
  
• The bank expects sustained growth in commercial and industrial (C&I) lending, particularly within its entertainment and private equity sectors, potentially boosting revenue and net interest income.
  
• East West's deposits grew by 3% quarter-over-quarter, and the bank is lowering deposit costs, which should support enhanced net interest margins and contribute to future earnings.
  
• Robust fee income growth, driven by increasing traction in lending, wealth management, and deposit fees, will likely continue to contribute to revenue growth and expand noninterest income.
  
• Capital management strategies, including a focus on maintaining high regulatory capital ratios and possibly opportunistic buybacks, suggest potential for enhanced shareholder returns and earnings per share growth.

East West Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming East West Bancorp's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 46.0% today to 44.6% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $10.02) by about November 2027, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2027 earnings, down from 13.0x today. This future PE is about the same as the current PE for the US Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 0.85% 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

• Investors note that non-interest income growth is partly driven by rate volatility and strong equity markets, suggesting potential vulnerability to decreases if market conditions change, which could impact overall earnings.
  
• The loan growth dependence on existing customer drawdowns poses a risk if customers continue to hold off on capital investments, potentially limiting revenue growth.
  
• Commercial real estate presents a risk with scheduled maturities and potential market volatility, which could pressure net margins if conditions worsen or refinancing challenges arise.
  
• The prolonged impact of potential interest rate cuts could reduce net interest income, as lower interest rate environments might compress net interest margins.
  
• Heavy concentration in time deposits, particularly under various rate considerations, poses liquidity management risks and could constrain efforts to optimize liabilities, affecting earnings.

Valuation

• The analysts have a consensus price target of $107.85 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 $127.0, and the most bearish reporting a price target of just $95.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.0 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $104.23, the analyst's price target of $107.85 is 3.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.