Okay. You all set?
Yep.
Thanks everybody for joining us today. We're excited to have a mid-cap bank track kicked off by East West Bancorp. We're pleased to be joined by CEO, Dominic Ng, so thanks very much for joining us today.
Thank you for inviting me here.
So I think, you know, we'll start with a few questions. We have a few questions from the audience, and then hopefully, you all have a couple questions you'd be looking to answer or ask, and then we'll continue the conversation. But thanks very much. You know, I think, you know, for a while, East West has really been able to outperform guidance on growth as we were moving through the COVID era. You were one of the leaders on the growth side. The strength of the capital base, as well as the continued client confidence, kept the growth at the top of the peer group. You know, as we entered twenty twenty-four, the outlook slowed a little bit while growth rates remained high, and you've spoken about having a more balanced approach between C&I, CRE, and residential.
How does that future growth look different compared to what you've done in the past historically?
I think that from my perspective is that at East West Bank was always focusing on having sustainable growth consistently in the long term and making sure that we always perform at the top quartile financially. We have always been able to do that, so I think when it comes to loan growth, deposit growth, it's really coming back down to the means to the end. We have many different, you know, tools to get ourselves into the top-performing banks in a consistent manner. I looked at it in two thousand twenty-four with the interest rate environment. It's just that probably not too prudent to be in a high growth position on the loan growth side.
And our customers are also pretty savvy, and, quite frankly, in the C&I side, while we continue to book many new commitments, there are not much drawdown. I think that is one of the reasons why our loan growth has not been as strong as maybe in the past many years. The other part we also have to do with, if you look at in the commercial real estate sector, obviously, there is not a whole lot of transaction going on right now with interest rate being at this level. So we'd expect that, you know, for the balance of 2024, it's not gonna be a very high growth situation here. But relatively speaking, I would say we're probably still doing better than the other peers.
Great. You know, you bring a unique perspective to this conference as one of the longest-tenured CEOs, certainly among the mid-cap banks. What's the tone of conversations with clients now versus a year ago? How much do you think higher rates were holding people back from their, you know, own look or their own desire for growth? And are they now more willing to make investments in their businesses?
I think the higher rate, obviously, it makes it a little bit more challenging from both M&A or making investments, putting the capital to work in terms of building out their business. Plus, the rate high, this makes it a little bit more challenging for people to actually make some of the transaction works. That said, I also looked at it as that for 2024, particularly in the next few months, there's gonna be a little bit more of a wait-and-see situation. It is pretty obvious that the Federal Reserve Bank have announced quite transparently that they're gonna cut rate. How much? We don't know yet.
But I mean, so far, Jay Powell has been pretty consistent in terms of sending out the signal and doing exactly what he said he's gonna do. And I do feel that investors, and particularly many of our savvy clients, are gonna look at the presidential election and would say that, "Well, at this point, it's hard to tell. Let's just wait till the election's over and figure out who's winning, who's losing." And then on top of it, there's gonna be an announcement, and from then on, I think people is gonna start making their investment accordingly.
Great. You know, to the extent potential credit concerns were causing you to be more selective in growth, has that begun to abate now that you've seen strong performance and, you know, rates are starting to or indicating to go lower?
You're talking about the loan?
Just credit. Your view on credit, potentially of holding back growth earlier on and the performance of credit being strong. Is that an opportunity for a catalyst?
I would say that really, when it comes to growing in the future, it's a combination. I think the economy will obviously have a little bit of a factor because that would affect rate cuts, right? But it all depends because if there are substantial rate cuts, which is much more favorable for doing deals, that also must be a signal of a recession. And at that point, it may not be that easy to do deals. So it's really going into from an economic standpoint. It all depends on why the rates are coming down and to what extent, who are the winners, who are the losers? We tend to bank a lot of winners, so therefore, I think that helps.
When it comes to credit, I actually looked at what we've seen today is pretty much working out as what we kinda expected in the last few years. What I mean is that I started worrying about the economy since late two thousand fifteen. I thought the market was too hot at that time. We actually, I mean, having a pretty intense, robust credit portfolio review on a monthly basis in all the different C&I loans in different industry sectors and the CRE loans, et cetera, and not on the single family because we never had losses there. So we've been just doing a lot of intensive review.
What we found interesting is that at that time, we identified some of the credits that we classified as maybe watch, special mention, and even some of them substandard. We've done that since then, every single year. I do feel that that helped quite a bit to why we had lower charge-off, lower NPA, and better criticized assets than most of our peers. I think that during that time, when we was doing those pretty intense review and got us into a situation that despite, you know, the tariff from two thousand and seventeen and forward to where it is today, we did not have one trade finance loans as cross-border trade finance loan that went under. That actually, that we have to take a charge off on.
And also the fact that during COVID, we didn't really have much of an issue, and even before and after. And then as of today, and I look at our C&I loans, yes, you know, it normalized slightly, but still, relatively speaking, it's relatively benign, and we expect that to be more or less the same, probably going forward in the next year or so. So yes, I'm feeling a little bit more comfortable with the credit situation, but when it comes to growth, I think it really has a lot to do with, one, what the customer will do based on the interest rate environment and based on the economic situation, based on who's the president. And the second part, it has to do with East West, our own execution. And that is that, for years, many...
So quite a bit of the percentage of growth from East West has to do with our expansion in various industry sectors. So in 2010, 2011, we got into entertainment industry, and then later on, we got into private equity, the subscription lines, and then healthcare and structured finance, et cetera, et cetera. Those growth helped East West to get in, into a higher growth situation than the other banks. What we are doing right now is that we're continuing to explore, to find opportunities going forward in the next few years. So every few years, East West, we're going to be able to find some new sector or maybe able to take on some of these industry that we've done well, but expand it even further.
And so those are the combination that we do, and by doing that, we don't have to be subject to the economic condition. What I looked at it is that good time, bad time, we're always done well. That is that because we have always other opportunities out there, other growth engine that we're building, that we get there. The good news sometimes is that, like a slow economy or a bad economy, is that we actually have more opportunities because we have more capital, we have a stronger balance sheet, and we actually have a much stronger return than everybody else. And with that standpoint, that allow us to be able to capitalize on whatever potential opportunities out there.
You've been speaking about a more balanced approach to growth for the last few quarters. You know, looking at it, the three buckets of C&I, CRE, and residential. How should we be thinking, what are some of those opportunities to balance that growth? Where should we be thinking, you know, the next steps are for East West in getting to that more balanced approach to growth?
Yeah, our balanced approach to growth is really coming back down to, we wanted to make sure we do not have any particular area or sectors or industry that we sort of have a overconcentration. You know, for years, you know, whether it's the global financial crisis in two thousand and eight versus what happened last year, you know, with Silicon Valley Bank and then a couple of other banks' problem. What you notice is that, by and large, whether it's a liquidity issue or overconcentration in any particular sector, would hurt, you know, an organization to go, unravel. For East West, we have always had a very balanced, you know, portfolio.
And the way I looked at it is that, clearly, when I look at with commercial real estate, we have, relatively speaking, more or less a full plate because it's like a little bit over 30%. And then I looked at it, is that, at that level, I'm not sure I want to be out there, keep looking at that as CRE as, say, area, that we want to push some high growth. Despite the fact that there are quite a few of what I call distressed situation, is very, very attractive, we have taken the position that we're here to help our long-time, strong CRE customers. And anytime they come in here for a deal, they said, "I just found this one particular opportunity that at 60%-70% discount, and I want to buy it." I said, "Here we go." We step right up.
We got plenty of room to support these strong existing clients to do what they wanted to do. And frankly, the reason they've been a long time East West customers, I've been the CEO for the thirty-two years now. Some of them been with me for thirty-two years. The reason they last that long is because they don't make mistake, right? Those who make mistakes, gone. So because they don't make mistakes, they usually are very choosy. So they are not doing much. I expect them to do more, actually, maybe a year, a year and a half from now. But as of now, they haven't do much, and so we haven't been that busy. In CRE, actually, would you see that, you know, our portfolio kind of shrunk a little, you know?
But on C&I, we booked a lot of new business, not because the market is strong, not because interest rate is benign. It's because there are a lot of opportunity for us to acquire new clients from, customers that were sort of like disappointed with their bank not willing to do what, some of the good things they wanted to do. The issue is that, again, these are smart, savvy customers. They don't want to draw down. They said, "Not yet. I just want to have my commitment here at East West" and then whatnot, but they're not doing too much draw down. So and that's kind of slow a little bit, but I expect that we have plenty of room to grow C&I, and we will continue, and in the future, in the next few years, grow C&I portfolio.
The single-family, we got room, and our single-family mortgages still hardly ever have any losses. You know, we have average loan-to-value at a very low, you know, 50% or so. So we feel pretty good about growing that sector too. So I think that if you look at in 2025 and forward, most likely you will see C&I and also single-family group will grow a bit faster than our growth in CRE.
You know, credit has been a focus of investors. I mean, it's always a focus of investors, but it's been an enhanced focus of investors for the last few years. Performance has been very good. Where are you seeing any areas of concern, or where are you spending more of your focus on the credit side, and where are there potentially opportunities to take that market share if other lenders have been pulling back or retrenching because of credit concerns?
I think that, you know, again, when I look at going forward in the future, I would expect that for CRE, probably, you know, maybe a year, a year and a half from now, because, you know, the rate drop is not going to be fast enough that really make it that compelling for many of the investors to jump in. But my view is that right now, a lot of the folks that are going for distressed asset are using mostly the cash. But that's not an area that we want to be getting way too excited with. Our position is that we still see that the extraordinary opportunity for East West Bank in the cross-border area.
We are one of the few banks in the country that actually have a true strong expertise in cross-border business. As I said earlier, you know, even from two thousand and seventeen all the way to existing, that with so much, these high tariffs that are going on, there's still tremendous import-export between U.S. and Asia, and that's not going to change, and it may be a different kind of import or export, but it's not going to change. So, but the great news is that so far, we haven't seen many of our peers or competitors stepping into this space, so we pretty much are sitting here in a dominant position. More importantly, six, seven years ago, we were just half the size that we are today.
As we grew into, like right now, $72 billion-$73 billion, we're now the largest bank headquartered in the state, Southern California. And with the size, with the name recognition, it just makes it so much easier for us to do business, so much easier for us to recruit better talent. And with, you know, over $1 billion after-tax profit, it makes it so much easier for us to reinvest into infrastructure. You know, some treasury management, etc., and wealth management, all these other fee income opportunity allow us to be able to put more investment into it, to turn it into, you know, additional profit going forward. So those are kind of things that we got really excited about.
That's a good segue, I think, to the fee income side of the discussion. You have seen really strong growth in certain areas of fee income. Like, you know, for instance, your FX is significantly bigger than most banks' size, obviously, with your financial bridge between the East and West helping with that. Where else in the fee income side could you see resources being allocated, and what are some of the goals for broader fee income growth that you have over the next few years?
Too bad this is recorded, because I was going to not—I mean, I keep lecturing my team about why they couldn't have substantially higher fee income on foreign exchange and, you know, treasury management, treasury fee income and whatnot. But quite frankly, those are areas that we really want to focus on. We are building a better, you know, system from the technology side, infrastructure, and we are recruiting strong expertise that have a stronger knowledge in this area. And we do feel that, you know, there are banks that either understand and know how to explore and take advantage of this space, or there are banks that who just don't want to have anything to do with it.
We like to be in the business when other banks don't want to have much to do with it, because that makes it much easier for us to acquire strong, sustainable, profitable clients. The worst thing is to be in a business when everybody does. Once you're in a business when everybody does, everyone can do exactly what you do. The only way you can win is cut pricing or maybe take more risk. Now, all banks, and most banks will tell you that, "No, it's different because our people are better." Yeah. I mean, I, I hope that that's true, that their people are better, but the reality is that usually don't work out that way, you know?
Our position is to make sure that we engaged and focus on areas that we really have a differentiated capability, which give us a different value proposition, which allow us to be able to build our business in a sustainable and expandable manner. Yeah.
Great. Maybe let's go to the audience. I'd love to see if there's any questions that the audience has. But first, maybe we'll do our audience response questions, and then open it up for Q&A from the audience. So I guess everybody has their devices in front of them. You can respond. The first question: What's your current position in the shares of East West? Overweight, market weight, underweight, or not involved? We'll give that a minute and see. Okay, that's. So you know, it looks like you have a room full or a lot of people in the room that are potentially available as investors. 41% not currently involved, 33% overweight, 15% market weight, and only 11% underweight short.
So, definitely feels like there's some opportunity there. The second question: How many basis points and rate cuts do we need to see for commercial loan demand to be impacted by Fed actions?
Twenty-five basis points, fifty basis points, one hundred basis points, or one hundred and fifty or more.
We'll see what the audience thinks here. Okay, everybody's locked in, it looks like. Oh, so it feels like, you know, it's still a little later on into twenty-five before we see a big change. So, 80%, 81% at a hundred or more basis points, only 18.5% at fifty basis points. Nobody at twenty-five. Third question, you know, for East West: Where will CD promo rates be by mid 2025?
Less than 4%, 4-4.5%, 4.5-5%, or greater than 5%? Chris, you can't answer. Okay. So, you know, still some room to move lower. So the biggest response, 4-4.5%, followed by less than 4%. So you know, could be some opportunity for pickup on the funding side. And then, final question for the audience: Which would have the most impact on improving East West valuation? Above peer loan growth, better relative margin performance, stronger fee growth, better expense control, credit quality outperformance, more active share repurchase, or an accretive bank acquisition. A little bit of a selection there. Okay, let's see what...
Wow, so, you know, it looks like between a bank, accretive bank acquisition and a more active share repurchase, capital management is at the top of people's minds. Better relative margin performance and credit quality outperformance tie for, call it second, and then, you know, growth in fees and loans rounding out. So it feels like, you know, it follows a little bit of what you've been laying out. So that's a good start. Let's see if there's any audience questions. Please raise your hands. There's some microphones. There we go.
So everyone thought that we probably need, I think it was about 100 basis points and rate cuts to stimulate commercial loan demand. Did you feel like that's accurate, or what, what's your personal view on that?
Yeah, I would say that, yeah, 100 basis point would be definitely meaningful. That clearly can move the needle. My view is I would pretty much agree with most of you guys, you know, indicated. I just don't think that 50 basis point would be nice, symbolically. You know, 25 basis point might as well, whatever, you know? That doesn't mean much. I really feel that, but if they start with, you know, 50 basis point, then it sends a good signal. But once you get to 100 basis point, I would absolutely think that there will be quite a bit of movement, you know, assuming the 100 basis point is not because the market had caused a quick 100 basis point. Yeah.
Anyone else?
... Thanks. As you guys get bigger and closer to the hundred billion mark, I know, you know, you guys have run a tremendously efficient organization. How do you think about investing as you get closer to that point?
Actually, we've always been investing, but we just don't do these sort of like, one-time big investment, make big announcement, and then, and then several years later, and then one time, big investment. We don't do that. We just every year, gradually, we set aside, you know, money to invest different areas from technology, you know, people, and even, you know, third-party outsourcing and whatnot. I would say that, looking at, you know, where we are, $73 billion, so clearly we're edging closer, not that close, but to $100 billion. So you look at California, it's not like there is anybody around that is bigger than us other than Wells Fargo, which, by the way, nobody works in San Francisco anyway. They're all in New York.
So but the fact is, because we are kind of like the biggest one there, and we pretty much automatically assume that we are—we're going to be, view ourselves like almost like $100 billion. Because one way or the other, whether we just gradually grow into it or if there's opportunity to come along, so we end up getting into it because of an acquisition and whatnot, we're going to get there anyway. So we are pretty much preparing ourselves, going in that direction. And I've been in the business now, like I said, the CEO of East West Bank for 32 years. When I first took over East West, we were savings and loan, $600 million in assets and to where we are.
And so been through many different kinds of congressional-mandated legislation, and then whether it's FDIC or way back, you know, from FSLIC to OTS and then FDIC to now Federal Reserve Bank. Been there, done that, and I've always told our team members. I said, "If you don't like to be regulated, you don't want to be in this business." We are in a relatively heavily regulated business, but within that confine, I do find that there are plenty of opportunities to do great work. There are actually plenty of opportunities to make money, and the return to our shareholders is actually pretty good. I just went into Nasdaq to ring the bell for our twenty-fifth-year anniversary to be listed on Nasdaq. Our East West Bank return substantially outperformed, you know, the Nasdaq index.
So we feel really good about, hey, just because we're a bank doesn't mean that we should feel ashamed of cannot compete against those, dot-com company, you know, internet or right now AI, because most of these folks out there are doing these explosive growth. At some point in time, they exploded and disappeared. And it'd be nice whenever you have an organization that can just, just keep pushing up, keep pushing up slowly, gradually, is actually not bad. But because of that reason, that's why I have so much more respect of, investing and growing our organization. Now, I don't know what our efficiency ratio would be, later on, but what I do focus on really is pretty consistent. That is that East West need to be in the top quartile.
So far, we've always been in the probably the top 5% or whatnot, compared with our peers in terms of return on equity, return on assets, and it cannot be just looking at one quarter or one year. We got to look at it in a five-year span, ten-year span, and you know, the nice thing about being listed, been twenty-five years now. When I look at it, we compare with any kind of different angle, we still outperform our peers, and that's all that matters. That's what we've been continuing to focus on in that direction. If that takes substantially more investment and our efficiency ratio goes up, so be it. So long as we, relatively speaking, compare to our peers so we can outperform them, and that's what we've been focusing on.
Great. Thanks. Grant, back again.
... You've obviously had tremendous success growing the franchise, and it's been a while since you've done a meaningful acquisition. Sounds like people, for some reason, think you should be doing some kind of accretive M&A transaction, but do you really feel the need to do anything? And if so, what would it be, geographically wise, product wise? So that's my question.
We've been very active in acquisitions. I would say, in the late nineties to late 2000. At that time, and for very good reason, because there's really nothing that East West does from a sort of like, my personal interest of buying banks or anything like that. I just do. You know, I'm a hired gun. You know, I was hired to be the CEO of East West Bank in 1992, and today I'm still a hired gun. I mean, institutional investors are our primary investors. So the way I looked at it is that, what do we do to make sure that East West have a sustainable future? That our customers don't have to worry about doing banking with us, because one day we may just suddenly go south.
What do I do to make sure that employees feel like that they are vested, engaged with the bank? So under all these various reasons, we, maybe every decade or so, we have to do something different. In the early time of East West Bank, I wanted to convert from a savings and loan to a commercial bank, because I didn't think that savings alone will be a business model that can survive in the long run, right? So I spent all the time doing that. So that's why I didn't do any acquisition other than right at the beginning, I bought some cheap stuff from RTC. That was a great deal. Yeah, but after that, I didn't buy anything because it wasn't, we weren't prepared to be able to acquire someone else. But in nineteen ninety-nine, I started acquisition.
From 1999 to 2007 , every year I bought a small bank. Why? Because at that time, in 1999 , East West were small. We were about maybe less than $2 billion. At that small size, doing roll-up, just buying another small community bank, roll up. You know, we trade at a higher multiple, buying another smaller bank and then roll it up, take out the expenses, pretty much take out small business, small customers here and there, and that's what we did. Until obviously, after two thousand and seven, two thousand and eight, stop buying because we have to make sure that watch my own shop. Global financial crisis, we got to talk to each and every one of customers, ask them not to worry about uninsured deposit back then, right?
Then, in 2009, you know, the FDIC called and then say, "Hey, need you to take over a troubled bank." So we double the size, and at that point, now it's in a different ballgame. When we were from $10 billion to $20 billion with the acquisition, and pretty much have all the credit issues taken care of. And at that time, we start getting to a organic growth mode, because that was appropriate to get an organic growth mode, simply because, at that time, we have so much cash flow to allow us to invest in various industry verticals like entertainment, private equity, you know, high tech, biotech, life science, you know, clean tech, and healthcare, and all of these different sectors that we feel for East West to properly build out our capability.
To resonate better with our cross-border clients, we need to have expertise in all these different industries, and that's what we did. And when we were doing that, we didn't really have time to get into buying another small community bank, and all they got is CRE anyway, right? It's not worth doing that. So as we looked at where we are today, and I would say that it wasn't like there weren't a lot of choices out there, and they were not cheap. Today, we can easily get someone really, really cheap. But whenever we look at the balance sheet, we say, "What's in it for us? We already have some pretty good CRE. Do I need more CRE?" Probably not. Then, do I need to have more consolidation to push my efficiency ratio down to from 30-something to 29? Probably not.
It's really looking at what is the better way for us to grow organically. The conclusion was that we really had a hard time to find some of the smaller banks that we can take it over, that they can actually add much values to us. Now, granted, had we not have any growth at all, if we were at, like, a 1% or negative growth in terms of loans and deposits, hey, maybe some of those not too attractive kind of acquisitions still look attractive. But quite frankly, we don't have to do that because we were able to grow organically. So far, we're still, even in this very tough interest rate environment, we're still growing. As long as we continue to have that, we probably would have a hard time to find a strategically meaningful acquisition.
That's not to say that I'm not interested to acquire bank. I mean, I started my career in actually doing a lot of M&A work, so therefore, that's something that I'm very comfortable to do. It's just that we have not yet been able to find something that we are attractive.
You know, on that topic, how should we then think about capital management from here? You're continuing to grow capital. You're saying now you're not in the business of warehousing capital with less opportunity for M&A. Should we be thinking that the buyback is a more aggressive tool that you're going to be utilizing going forward?
It depends, because we have always run East West Bank with robust capital. And the way that we looked at it is that it's a premium to do business when we actually have the ability to tell a prospect or even existing clients that, "Hey, look at East West Bank capital ratio." Well, higher than all our peers, or at least maybe we're at the 95% of all our peers, and then we compare the large banks, we're substantially higher than them. Once we put out this capital ratio, it gives customers so much ease. And if I looked at last year, in two thousand and...
I mean, March last year, you know, on March 9th, all the way till March sixteenth, I had to make a place a lot-- had a lot of phone call, you know, because it's not just Silicon Valley Bank, and then next thing happened to other banks who are coming down. And, customers had concerns, you know? But my simple answer to them said, "Look at my capital ratio. Look at how much money"-- I said, "First of all, look at how much money I, we made, and then look at how much capital I have. If things go haywire, if I have to really pay up for additional deposit or if I, if I have to shrink the balance sheet down, I still have so much sort of like profit that can sustain losses. In addition to that, my capital ratio is so much higher.
I have so much more cushion," and that immediately calmed our customer down. That's why our deposit moved like maybe at 1% or something. And then when I looked at in the industry, wow, there's a lot of ups and downs in deposits. And this is something that, you know, these high capital ratio buys so much more confidence from our customers and from our own employees, too. There's one thing about, you know, me telling the customer, but with our size, I have five hundred and fifty thousand customers, or maybe today, I think even higher. I need somebody else to relay the message, and our employees need to feel confident that we have the ability to sustain. So that is a given, and I would say that going forward, you will always see East West in that position.
That's why I want to make sure we also perform in the highest quartile. So the idea is that no investor is gonna like me talking about, "Well, I need more capital. I need more capital," when our performance in terms of return on equity and return on assets sucks, right? Because anybody can look at it and say, "Yeah, you have high return, but you perform in the bottom quarter. That's not good," right? So now we are at the top and also have the highest capital in the top, and then everybody else just gives you some room to do what you do. And that's what we've been doing. Now, that doesn't mean that we are also silly enough not to make some of these repurchases at the appropriate time. So we've done that, and we'll continue to do it.
We will always be somewhat opportunistic, a little bit more selective. So every now and then, we may not be buying much because we think that, well, maybe there are opportunities we can buy something even at a better time. So it all varies, but I would say more or less, you can always count on that our capital ratio is always gonna be at the top level. Just like our way of pushing our team to make sure that our return on equity is always in the top quartile, and that's what we're gonna be.
Great. Well, thank you very much. We're at the end of our time. Western Alliance will be in the room in five minutes, but, please give a round of applause to Dominic and East West, and thanks very much.