All right. Up next, we have East West Bank. Before we start, I'm going to read a disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. Taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your MS sales representative. With that out of the way, I'm delighted to have with us today Chris Del Moral-Niles, Chief Financial Officer of East West. Chris, welcome to the conference.
[Madam], thanks for having us. Delighted to be here.
Thank you for all those who stayed after the great presenter who preceded us.
We have a lot of interesting stuff to discuss today. Let's get right into it. Chris, we'd love to start with an update on what you're hearing from clients. We've heard a lot of chatter about tariffs, but you've also noted before that East West clients have been dealing with tariffs for eight years now. What are you hearing from clients, and how has it changed since April?
Yeah. The good news is what we're hearing is fairly consistent. They have been thinking about this for a long time. They are in their ninth year of assessing how they grapple with the changing context of tariffs, the context of trade dynamics. They are ahead of these things. What's reassuring is clearly they did not wait to see what happened post the election. They immediately took action to position themselves for what could happen and were proactive in that regard. What I would say is our takeaway possibly from April is they did not hesitate to look at the pause as something to be leaned into. If anything, activity that we expected to continue to ebb, in fact, stabilized or stayed consistent as we moved through April, which perhaps was better than anticipated.
Activity levels were modestly better, and we did not see normal downward dynamics, and that has helped give it a nice base for the second quarter. There is a lot of stuff still out there, and there is a lot of uncertainty in the future ahead. The pause does expire here in July, and we do not know what the next six months hold. It is too early to declare any sort of clarity. At least for the current environment, our customers are not waiting for that clarity. They are each day making moves that they think position them to be better in place to deal with whatever uncertainty comes. To a certain extent, I think that is part of Dominic's mindset as well. We are not going to outguess, outsmart the various folks that are sort of gaming different scenarios.
What we have to do is be nimble and ready to deal with whatever punches come and deal with whatever changes happen as best we can to support the needs of our customers. They are out there, to a certain extent, making decisions already. They're not waiting. Our ability to be there to support them as they make their decisions in what's best for their own organizations, their own customers, their own supply chains, their own processes, that's where we add value. That value continues to apparently have demand, and we're delighted that they're working with us as they work through these times.
Is there a broader summary or maybe some anecdotal evidence that you're hearing from customers? Because as I think about the difference between what happened this time and what happened about eight years ago, the application of tariffs is beyond just China. What kinds of decisions are customers making, whether they may have moved their businesses elsewhere in Southeast Asia, now we're worried about some reciprocal tariffs there? How are they thinking about this evolving landscape?
They've been thinking about it. As you rightly pointed out, many of them earlier on took opportunities to diversify their supply chains and move some production outside to other areas. Some moved it even to Mexico. Frankly, some moved it even to the States. All of that has happened. Many of them, apparently, took the opportunity to either go to their buyers or to their own warehouse folks and say, "We're going to ship inventory over." In some cases, they negotiated, "Buy the next six months of inventory, and I'll give you a discount." They then sold that on and delivered it. In some cases, they just picked everything up off the factory floor and shipped it to a warehouse somewhere in Riverside. That's fine. Either way, they got it here, and that happened already.
They then looked at the pause, and I think we're seeing different things happen. Some are rethinking, "What does this really mean for us in the long term?" I think one of the important things to keep in mind, though, is that our customers, whether they're third generation, second generation, first generation, or still an importer today that's based somewhere else that's selling goods in the U.S., they all make their money here, which is to say their payment is coming to them from their business and activities and sales, whether that's because they collect rents on their multifamily properties in San Gabriel Valley, whether that's because they sell food across California, whether that's because they're selling something through Costco in the frozen food aisle, or whether that's because they're importing things that Walmart and Amazon customers are buying off the shelves or off the online storefronts.
They're all making their money here. It has a very interesting dynamic where we're really tied to the broader U.S. consumer demand base, and that really hasn't cracked. We see the employment dynamics in Southern California, they're positive. We see the general economic output, and it still seems like it's holding. As long as that's holding, I think we're well positioned, and there'll be ongoing need to support our customers across that entire panoply of services and product lines. I think that's working so far.
As they make that incremental dollar here in the U.S., with the higher level of uncertainty, what are they doing with that incremental dollar? I think last time you mentioned that you actually saw people hold more deposits here in the U.S. when that happened. Is that happening now?
Yeah. Deposits are up modestly quarter to quarter, and loans are up modestly quarter to quarter. I think we're in line with our guidance and expectations, but we're continuing to see positive dynamics on both those fronts.
All right. Perfect. I do want to get into some of the near-term guide, but just before that, I think a great point that Dominic made on the earnings call was that East West has the experience, the expertise, and the balance sheet to help clients navigate what will be an increasingly complex environment. That can actually help bring more customers to the bank.
Yes. I have seen that now and sort of how that has played out. I missed March Madness, March of 2023 here, but I heard the anecdotes. As we saw during the first quarter, we were aggressively pricing deposits down. One of our concerns would be that the pricing downward would result in a negative flow cycle of additional deposits. In fact, people were able to go to their customers and say, "Yeah, we are pricing down, but that is because we are still one of the strongest banks in the country, and we just do not need it the same way maybe others do." If someone is bidding for your deposit at a much higher level, maybe they just need it a lot more than we do.
In a weird way, that messaging resulted in people saying, "Oh, well, maybe we'll just leave it where it is then, even at a lower price." I think that's a positive dynamic. That's evidence of the fact that there is an element of this conversation for various subsets of customers. It's not ultimately about the price. It's about, do they feel comfortable? Do they like the service they get? Do they feel they're getting a fair return on whatever their investment and/or deposit or lending relationship is? Are they comforted by the fact that we've got the capital to be one of the strongest and safest banks in the country? The answer apparently to that is yes.
That's what drives the longer-term growth.
Yes.
Perfect. All right. Great. Maybe you alluded to the guidance. You pointed to above the higher end of the NII guide, the higher end of the revenue guide. Can you talk about, give us a little bit more color there?
Sure. I think we started the year with a certain outlook around 4%-6%, both in the balance sheet growth and the NII growth. I think at the beginning of the year, we could have assumed, and certainly the forwards assumed, there would be various rate actions starting as soon as June. We're sitting here on June 10, and it does not feel like a rate action is forthcoming here at this June meeting. None have happened so far. We know what the first five months of loan growth and deposit growth have trended, and they've trended overall positive. Therefore, the year is kind of half-baked. Based on that, it does not feel like the low end that we had out there, the 4%, made sense to reiterate.
The reality is we're trending at that 6% better, and we think that's a reasonable level for growth in this current environment, but also in recognition that a lot can change. Yeah, the first five months have come along nicely. The next seven months or six and a half months, things could still change. We are not in any way waving the flag of clarity because the reality is we all know there's a lot of uncertainty, but it does feel better than we would have feared and certainly not in line with the low end of what we had out there before. We felt it was appropriate to revise.
Right. You were saying that things are trending in the right direction. It is not just the fact that rates might be higher for longer. I know that the balance sheet is more asset-sensitive, but it is also the loans and deposits coming in slightly better than what you expected.
Yeah. We would have expected sort of a normal fluctuation in our activity levels and things pay down early in the quarter and then ramp up and pay down and ramp up. We just did not see the level of pay down, and we did not see the level of deposit outflow that we might have expected to see. That stability gives us comfort that things are holding together well and better than we would have expected earlier.
Got it. I know you kept the loan growth guide at 4%-6%. Is part of that to do with the uncertainty? Things are trending in the right direction, but there's not.
There's lots that can change. When the 90-day pause expires, we'll see what happens next. A lot could change. There's the expectation that the economy today remains reasonable, but I also just listened to Mark Zandi's preview of his mid-June forecast, and perhaps I'm more sanguine than he is. Maybe there's differences of opinion about what could happen in the next six months. If we take an appropriately cautious outlook, then yeah, there's no reason to change that outlook today on loan growth because I think that's a reasonable level. Clearly, we're trending better than that on some other measures.
All right. Perfect. As you think about NII for the year, you're looking for NII expansion through this year, even if we get more rate cuts, which is seeming more unlikely. Can you take us through some of the drivers behind that NII growth that you see for the year?
Yeah. I think the deposit repricing that we effected in Q1 had a material positive that will have a continuing positive dynamic. I think we were apprehensive that that repricing would result in some different dynamics in Q2. That has not happened. That is positive. We were also apprehensive that if rates remained elevated, there would be a continued outward migration from the non-interest-bearing into other interest-bearing products, that sort of mix shift. That has not happened. The mix is relatively stable. Those things did not happen on the deposit side. On the loan side, as you mentioned, rates will likely have been higher for longer. That means we have not seen the downdraft in C&I the way we thought we might.
We have seen the continuous rollover of both mortgages, residential mortgages, commercial real estate, smaller, but also important book, and the mortgage-backed securities portfolio, all from lower rates into current higher rate new production. Across the board, all of the fixed-rate assets that we have on the balance sheet, as they come due, are actually repricing modestly higher. Not huge, right? Because the CRE books in the high fives and is repricing in, sorry, the CRE books, high fives pricing into 6.25, 6.5. The residential books, also high fives, repricing in at 6.25, 6.375, right? It is not huge, but it is also not negative. That is a positive.
All right. As you think about the asset sensitivity of the balance sheet, would you consider moving more towards neutral over the next few quarters or next few years?
The bias would seem to be towards a downward momentum in Fed funds over some horizon, right? The answer is, yeah, we probably do not need to become more asset sensitive. If you look at our disclosure measures of asset sensitivity, we have been drifting from relatively asset sensitive downward. One of those dynamics is also because at one point in time, this bank was 40% DDA, and you have drifted towards 25, you inherently become less asset sensitive, right? You have less zero rate stuff. The dynamics run that way. We would anticipate that we will continue to dial back our asset sensitivity modestly in the current environment. The environment will shift, and we will reevaluate that.
We went from last year, we just saw value, even though we knew or anticipated rates would drop, and they did, but we knew that we saw value in the floating rate, Ginnie Mae floaters, for example, in the investment portfolio. This year, we've been more balanced in our purchases, right? So we're buying both fixed and floaters because we recognize, yeah, if they drop now, given current levels, given that the forwards aren't priced so dramatically lower, actually the fixed-rate product is similar total return profile, and maybe that makes sense for us.
I think you said at earnings you were more interested in that longer duration fixed-rate product. Rates are even higher now maybe than where they were at earnings. Clearly, there is that helping you on the NII side.
Right.
All right. Perfect. Great. Maybe switching over to loan growth, can you talk a little bit about the commercial side of the business? I know you're more focused on the C&I side. Which areas within C&I are you seeing the most growth in? Which areas are you most focused on?
I think we're thinking about the C&I book. Clearly, we're seeing growth in things like entertainment and things like inventory buildup in general finance. We're seeing things in some of the alternative power, be it solar farms, wind power, things are all moving in the right direction. All of those are good growth areas for us and will likely continue to be. We've hired people on those things. We're continuing to invest in capabilities to support those areas, and it's working right now. From a where do we see things? I mean, that probably answers the question.
Yeah. No, that's fair. Any other areas where you're seeing maybe a change in demand at the margin, whether it's like trade finance or any of the other businesses?
I think we saw a nice pickup in some of that activity in Q4, trade finance in particular. We saw pay downs in Q1. We've seen stability, perhaps more stability than we anticipated in Q2. I don't know that I would call it an acceleration, but it's stability. I think that given that there's no Christmas in July, that stability is interesting on the one hand, but also obviously welcome to the balance sheet.
Right. Perfect. While we are on the subject of loan growth, can you talk a little bit about how East West is positioned for the growth in private credit? Clearly, you guys compete with them. Do you partner with them? How do you see that relationship?
I think of it more as a partnership. I do not know that we are competing on a lot of fronts. I think the credit profile for most of what is private credit is usually outside of our core appetite box. Again, not to say that there is no overlap, but it is mostly, I think, beyond what we are normally doing. I think one of the dynamics about our bank is for a variety of reasons, our customers, whether they are residential customers, commercial real estate customers, or C&I customers, tend to approach their business activities with less leverage than other customer bases for a variety of reasons. Because of that, we do not therefore tend to compete in those higher LTV, higher leverage to cash flow type of opportunities that perhaps some of the private credit has gravitated towards.
I do not know that I see them the way perhaps some others do. We are not as active in the capital markets stuff that has some of those profiles. We like covenants, and we like conditions and terms and reporting. Those are not things that are attractive when someone lines up a package that has none of that. It is not very competitive from that perspective. We like to get paid. We put those together. They will go someplace else where they do not have to jump over those hurdles if the rates are close. We appreciate that. We do partner with some of those firms, and we are willing to do things at the edge where we are financing part of a fund someplace, right, or something like that. That is part of the private equity/NAV/other stuff, right?
We'll do a sliver of that because there's some of those groups that we like, and we're happy to partner with them.
Something that's getting increased focus is NDFI loans. I know there's more disclosure out there now. Can you talk a little bit about your exposure there and how that's been growing recently?
Yeah. We have been increasing the overall exposure. I think for some sectors, NDFI is very REIT or mortgage warehouse specific. Ours is less so. Obviously, we have the private equity portfolio work that we've done in that. Often a good portion of that shows up in NDFI, and you can see that from our call report breakouts. It has been growing. Some of the stuff that we've done in solar, for example, is rooftop solar, and that shows up as consumer NDFI. That happens. I think there's stuff like that that's out there, right? You want solar panels on your roof. Your contractor or salesperson says, "Yeah, we can provide them for you, and we'll get you financing in the background.
We'll do it on these terms." They will get part of their funding from a warehouse line, essentially with us, right, in the background. From our perspective, we have the likelihood that the consumer will likely pay because they probably want lights on in their house. We have the likelihood that the intermediary will support that. By the way, we're advancing a fraction of the total payment. It is likely that between that and the basket of other consumers, default risk is fairly low. That shows up as NDFI because we're financing someone who's not a bank who's in turn financing a customer.
Got it. So the actual exposure is a lot lower than what we actually see in the disclosure?
Yeah. From our perspective.
Got it. The other piece I wanted to chat on loan growth was Resi mortgage growth. That's always been a standout for the bank, and it's held up well through even the rate hike cycle and the higher long end of the curve. What are you seeing there as the tenure remains volatile right now?
Surprising stability. The reality is we have been producing a relatively steady drumbeat of around $200 million of net new volume to the balance sheet quarter after quarter. That seems to be holding relatively stable and steady. The pipelines, which obviously, as we sit here in June, are for Q3, seem to be consistent, right? As we sit here today, despite the volatility, despite the headlines, despite Liberation Day and noise and other dynamics, it did not change the fundamental desire to aspire to achieve the American dream of homeownership. That continues to be something that we are able to help those customers with. We continue to provide that on a fairly consistent basis.
Great. Maybe to round off the conversation on loans, on commercial real estate, I know you're focused on growing the CRE book a little slower than the rest of the book to reduce the total concentration in that asset class. Can you talk a little bit more about the strategy there and what you're doing right now?
Yeah. I think Dominic has articulated the profile that he thinks makes sense as we think about growing to be a $100 billion plus bank. As we get there, in his articulation of it, we should be closer to a third, a third, a third—a third residential, a third CRE, and a third C&I. As we look at that mix, then today, relative to that self-described vision of that balance, we are a little bit long in the CRE exposure at roughly 38%. He would like to see that balanced out. The way he would like to see that balanced out is by growing the C&I and the mortgage portfolios at a slightly faster clip than the CRE portfolio while still growing all three over time. Yes, we will continue to grow all three. Yes, there will be incremental growth in CRE.
I think he'd like to reserve that CRE growth for our most consistent, most profitable relationship customers. We haven't been taking on new customers. What we've observed in the last couple of years is there hasn't been a tremendous upswell of demand from our existing customers to help them with new projects and new opportunities. I will pause there because I think we were having a conversation just last week where it has come up through the ranks and the RM channels and the team leader channels that actually there are some folks that are now kicking the tires on properties in places like Chicago and San Francisco, which we were not doing anything new. Suddenly there is percolating, "Would you guys think about this if I did this?" etc.
Conversations happening that I haven't heard about for the last 18 months I've been here and weren't happening before I got here to some extent. Now those conversations are starting. I think there's an interesting level of there's some interest at some levels in some markets. We'll see how that plays out.
That goes back to the point of you have the balance sheet, you have the capital to be there for your clients, and you're willing to do that as long as there's good opportunity.
Absolutely.
Okay. Perfect. Two things I wanted to focus on that are fairly unique to East West. One is a better efficiency ratio than peers, and then the second one is more consistent growth over time. The first one on the efficiency ratio, you have a significantly better efficiency ratio than peers. Can you remind us what drives this consistent performance?
Sure. I think there's two or three key things. One is a fairly simple and straightforward business model. We don't try to be all things to all people. We're going to be very good at executing for our core customers in our core markets where they expect us to be with plain vanilla products that they utilize. We're not trying to be uber complex, and we're not trying to be the supermarket with all of the offerings. We're trying to be the tailored delivery of the goods that we know that we can deliver at the best possible solution for our customers at a very competitive price. That seems to work well for us. The second thing is speaking to that same customer set, at least on the deposit gathering, which I think is part of the cost structure for many banks, we are able to focus.
I think I heard the prior speaker here comment they could consider opening a branch in every capital across Europe. That's not going to be East West, right? We're going to be focused on being where our customers expect to find us and being there to help them in places that are in ways that are exactly what they need and not trying to be there to service needs that they might need, but really trying to be there for the things that we know they need and that we can deliver against. I think that means we can be very targeted in our approach to branching.
We can be very targeted in our approach to outreach while continuing to diversify the sophistication of our bankers broadly and the verticals and industries covered, but with a focus on making sure we're delivering simple, straightforward solutions in each of those coverage markets.
What does that mean in terms of the areas that you're most focused on for growth and the areas that you're investing most in for the next two to three years?
Yeah. So we have invested in, over time, substantial retail presence and depth in places like Southern California, San Francisco. We have invested more recently and through expansion into places like Dallas, Houston, Atlanta, New York, Boston, Seattle, Las Vegas. All of those markets probably are ripe for expansion, and we can consider how we would best approach those. On the other hand, we need to find the right people and the right talent to help us drive those expansion strategies. That is sometimes for us been the harder part. I think our focus is on making sure we find the right people so they can bring in the right talent so we can create the right expansion strategies to drive that. It is not because there is lack of opportunity.
It's simply we need to find the right talent that can help energize that in an East West efficient manner, right? I don't know that Dominic's a believer in if we build that they will come. We are not just going to go sprinkle branches about and hope that we attract the right branch manager and hope that we attract the right relationship managers and that will attract the right magical set of customers. I think he thinks about it a little differently. I think if we have a very targeted, focused approach, we identify key people, and we can bring those people together into an environment where we know they can be positioned for success, he's more than happy to invest for success.
Two follow-ups on that. One is in these new markets, Chicago, Atlanta, Dallas, Houston.
For the record, I don't think I said Chicago. We only have a loan correction office, but Chicago is an interesting market as well. Yes.
All right. Perfect. In these new markets, how do you think about the TAM in these new markets relative to California?
Sure.
It is clearly the East West brand is known best in California. When you are expanding in these different regions, how are you thinking about the investments you are making and the ROI on those investments?
Yeah. From a total addressable market perspective, California is a great market. By the way, so is New York, right? From our perspective, that's an opportunity that we also need to think about and focus on. We'd love to find the right way to create a larger market presence, whether that's further or deeper into Long Island, whether that's over to New Jersey. There is opportunity set here for us, and we know. There are addressable markets that we know we're not addressing that we know we could make more investments on. I spent part of Monday with our head of commercial, and we were looking at commercial office space because, frankly, we probably need to grow our overall profile and relationship bankers and, in typical East West way, fully maximize our existing office space, right?
We are thinking about what does that mean and how does that play out and how do we get the right answer to grow because the focus is on growth and we know there are growth opportunities here in New York. Similarly, we will look at growth opportunities in Texas because that is a growing market. There is growth not only in the cities that we are, but perhaps in other cities. I think we will look at all those and find the right way forward. Yeah, there are clearly addressable market opportunities where in California we know we are the lion's share in our focus markets and we are not in some other markets, and we could certainly capitalize on that. It helps that in some places, some of the folks that have historically been sort of legacy competitors are pulling back, right?
Whether it's a foreign bank or a domestic bank, if they're pulling back and they're creating opportunity for us, we're not going to hesitate to sort of invite people to coffee and have good conversations about what the future might hold.
Is the best way to grow these regions organically?
Yes.
All right. The other piece is on the fees side. You and I were talking offline about the payments business and any other areas where you want to be investing. Can you talk a little bit more about where you want to invest for the next two to three years and how you're going to get that strong fee growth that you are looking for and you are getting currently?
Yeah. We have been very active on core treasury deposit services. I think the other speaker was here. Frankly, I was a treasurer at a Fortune 500 company, and I know firsthand the pains of moving money internationally, etc. I was pleasantly surprised when I walked in that, yeah, East West has always done instantaneous, simultaneous book transfers within its own operations. If you want money in Hong Kong, snap your fingers, you have money in Hong Kong or vice versa, right? I think that is, I guess, different than some other institutions. That is great that we can do that. I know that we are working on plans to accelerate those payment streams and expand that to our Chinese subs as well and expand that to other areas, right?
I think we recognize that we can leverage those capabilities in ways that perhaps we have not before and we will do so in the future. I think that just tells us that our core payment processing capability is fairly competitive, and it is part of the reason why we have been as successful as we have been.
Got it.
When I think about the fee growth opportunities, it is one of the core drivers, right? I think about our ability to continuously expand our core deposit services, our what we call corporate treasury solutions, and those are working today. They're growing nicely, and we're seeing better traction in roads. When I think about the solutions we're providing in FX, we're investing in new platforms and systems. Those we expect will help us in the future. They're sort of still in the sort of process of rolling out or being completed for development, but we can see a path where we'll have greater capability in the year ahead. Even with the capabilities we have today, we're generating nice growth, so there's even better opportunities ahead.
All right. Perfect. I wanted to end with a couple of questions, one on credit and one on capital.
Sure.
On credit, I think in mid-April, you spoke about the fact that you had already had conversations with 500 commercial clients. You spoke about only 1% of the C&I book having potential adverse effects from tariffs. Can you talk a little bit about what you're seeing on the credit side?
Yeah. I do not know that there is a particular shift in anything from the tariff side of that. In general, credit for us is tied to the broader macroeconomic dynamics, and the broader macroeconomics are seemingly holding together. I do not know that I see credit as having deteriorated. As I sit here today, I think we are all apprehensive, but I think the reality is the American consumer is alive and well and continuing to support a lot of activity.
Right. You're not seeing any stress there from the consumer side. There have been some anecdotes of more pressure on maybe the subprime side or anywhere else. You're not really seeing that.
Yeah. We do not play in the consumer direct in any meaningful way. Where we do, which might be some of this NDFI stuff, we are at least one or two intermediaries removed. We feel like that is a lower risk approach.
Got it. All right. Perfect. To end on capital, CET1 ratio of 14.3%, so well above peers. You opportunistically leaned in on buybacks in the first quarter. Should we expect that you continue that strategy? The stock was lower in the first half of this quarter. How should we think about the capital return side of things?
Yeah. We're pretty careful about making sure we don't step over blackout periods, etc. So a lot of the period of time when the stock was lower was in a period before our earnings call. We didn't really have the opportunity to step in the way we would have liked to. We'll think about if there's other strategies that might address that, but we didn't. The pluses and minuses of being opportunistic is we don't have programmatic things out there that would work in those environments. On the other hand, it's fair to say we haven't leaned in in Q2 the way we did. We've been far more standoffish on that, in part because in the period of time it was open, it was above the levels we were buying back in Q1.
The environment and rhetoric led us to surmise there could be other opportunities or windows. We have not been as active, but we remain vigilant and will be remaining opportunistic.
All right. That's perfect.
Thank you.
Chris, we're out of time. Thank you so much for joining us.
Thank you, Madam. Appreciate it. Thanks.