Diversified Loan Portfolio And Robust Wealth Management Drive Profitability And Shareholder Value

Key Takeaways

• Expansion in targeted loan segments and record fee income from foreign exchange and wealth management suggest a strategy for diversified growth and profitability.
  
• Effective risk management indicated by strong asset quality, along with strategic share repurchases and a dividend announcement, highlights confidence in financial strength and shareholder value.
  
• Elevated funding costs and modest loan growth may lead to lower net interest income and overall revenue, impacting net margins.

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.

• Expansion in C&I and residential mortgage loan segments suggests targeted growth strategies that could enhance net interest income by diversifying the loan portfolio and capturing market share in high-demand sectors.
  
• Record quarterly fee income, particularly from foreign exchange and wealth management, suggests a scalable, noninterest revenue source that could improve overall revenue mix and profitability margins.
  
• Continued strong asset quality with low nonperforming asset ratios and a decrease in criticized loans indicates effective risk management practices that could lead to lower loan loss provisions, positively impacting net income.
  
• Strategic share repurchases under the current authorization demonstrate confidence in intrinsic value, supporting earnings per share growth through reduction in share count.
  
• Announcement of the dividend payable in the third quarter 2024 reinforces shareholder returns and may enhance stock attractiveness, potentially supporting stock re-rating.

Assumptions

• Analysts are assuming East West Bancorp's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 46.6% today to 42.4% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $9.14) by about September 2027, up from $1.1 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 12.1x on those 2027 earnings, up from 10.3x today. This future PE is greater than the current PE for the US Banks industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 2.03% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The expectation that net interest margin (NIM) will continue to face downward pressure due to elevated deposit and funding costs impacting net interest income.
  
• The moderate pace of commercial and industrial (C&I) loan growth in the latter half of the year could result in lesser interest income than anticipated.
  
• Any potential challenges in the commercial real estate loan portfolio, especially given modest CRE loan growth expectations, might impact asset quality and earnings.
  
• The forecast for net interest income to decline between 2% to 4% could hinder overall revenue growth.
  
• The anticipated increase in adjusted noninterest expense in the range of 6% to 8% might negatively impact net margins.

Valuation

• The analysts have a consensus price target of $98.29 for East West Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
• 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 $1.3 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 5.8%.
• Given the current share price of $81.53, the analyst's price target of $98.29 is 17.0% 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.