Lunar New Year Campaign And Fee Diversification Will Secure Future

Key Takeaways

• Deposit pricing optimization and successful campaigns like the Lunar New Year CD are expected to lower funding costs and boost net interest income.
  
• Strong loan growth and diversified fee income streams signal potential for future revenue and earnings increases, supported by robust capital levels and share repurchase strategies.
  
• Economic uncertainty, trade tensions, and interest rate fluctuations could constrain East West Bancorp's revenue, affecting credit losses, earnings growth, and risk management strategies.

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.

• The strategic optimization of deposit pricing and successful deposit campaigns, such as the Lunar New Year CD campaign, are expected to lower funding costs and increase customer deposits, positively impacting net interest income and overall earnings.
  
• Continued growth in residential mortgage and commercial real estate loans, supported by a strong pipeline, represents a positive catalyst for future revenue and net interest income growth.
  
• The increase in fee income by 8% from the previous quarter, along with a focus on diversifying fee revenue streams, indicates potential for further revenue growth.
  
• Strong capital levels and a robust balance sheet position East West Bancorp to support clients and capitalize on market opportunities, which could enhance net margins and earnings.
  
• The company’s repurchase of shares and available authorization for future buybacks suggest potential earnings per share (EPS) growth as a result of reduced share count and strategic capital returns.

East West Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming East West Bancorp's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 48.9% today to 43.5% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $10.03) by about April 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 12.7x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to decline by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

East West Bancorp Future Earnings Per Share Growth

Risks

• Economic uncertainty could impact East West Bancorp's revenue and net interest income as they might need to adjust the downside scenario weightings in their credit loss provision calculations, leading to potential increased allowances for credit losses.
  
• Heightened tariffs and adverse trade conditions with China and other regions could limit the bank's ability to maintain or grow its trade finance and cross-border revenues, potentially affecting overall revenue streams.
  
• Interest rate fluctuations, especially rate cuts, could affect net interest margin and net interest income negatively, impacting overall earnings despite loan and deposit growth.
  
• The increase in criticized C&I loans indicates potential credit risk exposure, which could elevate future credit costs, affecting net income and net margins.
  
• While maintaining strong capital levels allows flexibility, the cautious approach in leveraging capital for share buybacks and loan growth due to economic uncertainties could limit potential short-term earnings enhancements.

Valuation

• The analysts have a consensus price target of $105.75 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 $90.0.
  
• 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 12.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $79.21, the analyst price target of $105.75 is 25.1% 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.