BancAnalysts Association of Boston Conference

Nov 4, 2021

Hi, everyone. I'm Jerry Benson, and up next we have East West Bancorp. East West is a commercial bank specializing in commercial construction, real estate lending, as well as financing international trade. Headquartered in Pasadena, California, the bank has a particular focus on the Asian-American community, and it operates through 120 locations in major U.S. metro areas, in addition to China, Hong Kong, and Taiwan. At September 30th, East West had approximately $61 billion in assets. Presenting today for East West is Irene Oh, Executive Vice President and Chief Financial Officer. Irene joined East West in 2004 and was named CFO in January 2010. Joining Irene is Julianna Balicka, Director of Strategy and Corporate Development. With that, please join me in welcoming Irene and Juliana. Thank you, Jerry. Thank you, Jerry. We're so delighted to be here. Yeah, we really appreciate you making the effort. Unless you wanted to start off with anything top of mind, we're going to just do a fireside chat and just get some questions going. Audience, please feel free to chime in with any questions you have. That sounds great, Jerry. Sorry? That sounds great. Okay, great. Let's just start in general. East West, similar to all banks, is a product of its environment. Can you generally speak to macroeconomic expectations across the different markets in which you operate? Yeah, I think that's a great question, especially right now. What we're seeing in the markets that we're in is, generally speaking, things are much more positive post-COVID. Especially, I think, if you look at the regions we're in, China, Hong Kong, in some ways maybe related to COVID, we feel that those markets have bounced back a little bit faster, and we certainly see that in the business activity. Other areas where we have strong presence, California, New York Metro, small but growing presence in Texas and Seattle. All of those areas, we're very excited about the potential in the future. Particularly if you look at it from our clients, I would say that at this point in time, still clients have a lot of liquidity. We definitely see that on the deposit side. We definitely see that on the C&I utilization side. When you look at CRE, there is certain asset classes where there is a lot of activity. Cap rates all-time low, really, if you look at it, for certain industries such as industrial and multifamily. But I think there is enough activity and enough volume there, and certainly the sentiment is much more positive than it has been in the last 18 months or so. Well, that is great. Thank you. Just talking about it, you mentioned China when you were talking about just the health of the market, and I know you guys talk about being a financial bridge between the East and the West. And I know you have said in the past, the value proposition comes from your knowledge and expertise of knowing the regulatory change in both the U.S. and China. There is just so much going on. It is so dynamic right now, so I am just curious how you guys are viewing that at this point. Yeah, I do not think our views really changed, Jerry. We still feel that we have a value proposition to offer our clients. In a way, particularly in these times where maybe it is harder to navigate, even more reason why you need to bank with a bank like East West. I will just comment, too. Our portfolio that we have there, and it is much smaller versus our entire book of business on our entire loan book, is really focused on where is our value proposition, cross-border business. We have really stayed away from industries and sectors such as real estate for a variety of reasons, in both mainland China and in Hong Kong as well. So when I talk about the markets are a little bit better, I am talking specifically for East West as we emerge from the pandemic, and also the activity that we are seeing from our clients. Right. Okay. Thank you. You did touch upon this, the loan growth, and obviously you guys really stand out from the pack this year, having raised loan growth guidance for the past few quarters. Your commentary suggesting that this momentum has continued. Can you talk a bit about your expectations for loan growth over the next few quarters and talk about some of the drivers? Yep. Great question. When we did increase our guidance this year, I would characterize it as modest increases every time we increased it. When I look at the fourth quarter, to a certain extent, I think 2022, what we haven't seen yet really, Jerry, is really, as I mentioned earlier, with the line utilizations increasing. The growth that we've been seeing in C&I, largely for new clients that we are bringing on board. PPP definitely helped us with the number of new commercial small business customers we onboarded and getting our name out there. I think the business activity is increasing. Our commercial bankers are doing a great job of bringing in larger relationships as well. I'll also kind of add, related to our kind of why we're comfortable with the growth, I really think the diversified balance sheet and diversified business model that we have, from a loan product perspective, commercial, consumer, C&I, CRE, single-family, that certainly helps. This year, and last year as well to a certain extent, but maybe more so this year. Earlier in the year when there was more slowness in C&I growth, and we really didn't see the balance increase, single-family growth continued to be outstanding. I think that this has helped kind of propel our growth given the diversification and the number of sources, honestly, that we have for that growth. You've had real good success with your C&I verticals, your niche strategy. Do any stand out? In addition to that, are you evaluating any other additional verticals as you look into 2022? Yeah, great question. I think what we have seen also with the niche verticals, maybe similar to what I just spoke about with the diversification in our portfolio. We have so many different niche verticals. There have been times when some have done better, others haven't, and that's been able to also kind of sustain our growth. There were a few years where PE every month, every quarter, the balances came down. To a certain extent, that's still the case. A few years before, we saw a lot of growth in PE. But what we're seeing especially now, there are different verticals where maybe the growth was lower. We didn't lose the client relationships. It was just the business environment where we're seeing growth pick up. Overall, I think that helps us as well, the diversification, markets, sectors where there is growth, both here and China. When we talk about new verticals, we are always exploring that, Jerry. I think at this point in time, we feel that we have enough kind of expertise and bench strength throughout. However, there are a lot of verticals where we think that we need much more kind of penetration, and still, there is a lot of growth ability for us. We try to make sure there is enough diversification, limit setting in everywhere, risk relative to return. Some of these lending verticals, entertainment, PE, it is going on a decade here. I think we are also comfortable with the history and the experiences that we have had over this period of time. Occasionally, if there is a workout loan, how we work it out. That also informs our decision as far as the size and the exposures we are willing to take on. Right. Makes sense. You did highlight the utilization rate, and I think you mentioned on the last call that it may have hit a low at 69%, or it was near a trough. I am just curious on how you guys think about that and where it normalizes at. You did comment that there is a lot of liquidity in the system, obviously, but just kind of how you see that trajectory of that increasing. Yeah, honestly, I would have thought that it already increased at this point in time. I think across the board, if you look at our C&I clients, whether it is a smaller kind of mom-and-pop import-export company, trade finance. Also, certainly, the PE funds. We are growing commitments, we are growing customers, but line utilization is certainly not there. I think it is hard to say, quite frankly. I think the good thing about East West, with the growth that we have, we do not need the line utilization increase to really kind of hit those growth levels we would like. Certainly, it will help. 1%, 2%, 3% makes a big difference in the balance outstanding, NII, also just some profitability. But it is not something that we are banking on for growth. Right. It will take some time for that liquidity. I think we are realistic. It will take more time for the liquidity to kind of get reduced in the system. Some of our clients as well, generally at this point in time of the cycle, this point of time of the year, they would be borrowing, but they still have a lot of cash. They have other ability to kind of fund their businesses at this point in time. Right. Why don't we talk about that, the other side of the balance sheet. Your non-interest-bearing deposit growth has been extremely strong at East West, increased almost 20% sequentially in the most recent quarter. We have fiscal stimulus, easy monetary policy. Maybe you could talk about some of the drivers of growth and your expectations looking forward. Yeah. You're right. Those are certainly factors that we've considered and evaluated as far as with the deposit growth and the trajectory. We do not expect this kind of high double-digit deposit growth to continue. We're realistic with that. I think on top of that, we've had many clients who've gone public, have excess cash that they've raised through SPACs, whatever it may be. So we're evaluating this pretty carefully. But I would just point out, with the continuous investments that we have made the last several years for commercial deposit products and offerings, treasury management products and offerings. As I mentioned earlier with PPP, just the sheer number of commercial clients, large and also small clients from the retail branches that we've onboarded. It's truly exciting to see that and to see just the volume of transactions that have increased. Although I think we're realistic that there's a certain amount of, let's call it surge deposit, that may leave the system overall and may leave East West Bank. What I'm more interested about is those sticky kind of deposit relationships where I think there's more opportunity for fee income and a longer longevity. Actually, that's a good point. Why don't we talk about that a little bit, just in terms of your thoughts on the deposit duration and how that's impacting your liquidity deployment strategy. Yeah. It's certainly a factor. At various times, Jerry, the amount of cash that we've had at any given time has been truly shocking, quite honestly. Right. The deposit duration is a factor. As you know, it's also the shape of the curve and what we can redeploy it, and our expectation of what might happen with rates. Both of that's both been part of our consideration. I think at this point in time, we have, and we've taken action throughout the year, kind of depending on our understanding of what we could redeploy at, and then also our expectation of how our customers would be utilizing those deposits. You saw those actions that we took to redeploy excess cash into securities over the course of this year. Quite sizable, actually. Never did I think that we'd have that kind of securities deployment within a 9-month period. But those are things that we're actively monitoring and trying to balance out quite candidly. I would also just say, in continuation of what we said earlier, I don't think it's realistic to assume this level of deposit growth continues. To a certain extent, I think we're being a little cautious about that as well. Right. Let me pause for a second here. Whoops. Remind the audience that they can type in a question and send it in via the web. Either that or grab Gerard and have him run in here and ask me. Why don't we shift gears a little bit here, let's shift over to the cost side of the equation. East West has done well in recent years to keep costs contained and maintain positive operating leverage. Given the recent inflation and cost pressures, there's been investment in IT and acquired continuous IT spend. Can you talk to how comfortable you are in being able to contain expenses as we head into 2022? Yeah. I want to just clarify one of your comments, Jerry. I think it's not just the last few years. East West has always maintained a focus on cost containment, right? It hasn't always in every year, every quarter, resulted in positive operating leverage. But nonetheless, I think that focus and that discipline, and that culture for East West remains. I think that I want to just share. We're doing that while we are making the investments that we think are appropriate to grow the technology investments that we need to. A lot of that is customer-focused, quite frankly. Customer-focused in areas we think are critical for our customers. For example, say on the consumer side, we're not trying to have all the bells and whistles you'll have at your personal account at Chase. But we're focused on our product offerings that we think are more important to our clients and kind of getting out front and center with that. So for example, unlike probably any other bank in the country, we implemented through our mobile app, Alipay, so that our consumers can easily send money to China in RMB well before we implemented Zelle. Right? So things like that to try to focus and make sure our resources are widely used to things that we think are important to our clients. I think that's been a focus. Another area where we've spent tremendous amount of time and energy is really related to info security. To make sure from an infrastructure perspective, I think that we're comfortable. I think I also would just add, I think something maybe that we've done well is when we do implement systems, we try to go big, right? And have that be something that is scalable for a while. Towards the end of the life cycle of that, we may be on something somewhat ancient and need to upgrade. But I think what we try to do is get as much value as we can, as necessary. But as I mentioned, from a frontline perspective, a customer interaction perspective, areas where we think that we can kind of innovate or provide value, a lot of that is related to payments, cross-border payments. Ten years ago, our cross-border customer strategy was trade finance. Right? Importing before maybe 20 years ago, then exporting for a while with the growth in China. But now, it's really how are we helping our clients who are in the e-commerce space facilitate their trade? A lot of it is more focused on payment areas specific for our clients. So I want to just kind of just characterize that. I think we're always mindful of the spend and the cost, and making sure that there's a good balance with the revenue growth and the operating expense growth. But also the investments that are necessary to sustain our business. We do that. We don't manage to an efficiency ratio. When you think about the cross-border opportunity when you're looking forward, is there a bigger opportunity on the payment side, or is it still much more so on the credit side? I think both. We have certainly expanded relationships where we have relationships where maybe we started on the credit side, but we expanded to a deposit side, and the deposits and the fee income are certainly greater potential for us. That's also something that we balance out with kind of, is it scalable? I'm not looking to spend $1 million to only earn $1.1 million in fee. So that's something that we constantly spend time on, especially with some of the technology, the APIs that we're helping our clients with and utilizing. If you think about your top IT projects and what you want to work on, I think you're always going to have a long list and you need to prioritize. You say you try to balance. Do you try to target a certain efficiency ratio while you're incorporating a certain amount of projects each year? How do you evaluate that? Yeah. It's not an efficiency ratio. Certainly, I think from our overall kind of budgeting process, I look at that operating leverage, especially given the opportunities. But I would say kind of it's a bottoms-up approach, where we look at where we need to make the investments and look at kind of the IRR of the projects themselves. I'd only caveat things like info security. There's no IRR. I don't know what that IRR is. It's more of, what do we feel that we need to spend to make sure, I think from the perspective of safety for our clients, the data security, our network that we're keeping up. It's a different kind of calculus. Right. How do you assess that? I'm just curious. Because you could keep throwing a lot of money at it. There's a lot of unknowns. I'm just curious, do you try to target a certain percentage of the budget for that part? Yeah, that's a great question. It isn't necessarily a certain percentage of the budget targeted. We are highly regulated. There's a lot of guidance from the regulators and a lot of information that we get as far as what we need to do to be best of class, where the risks are. Overall, obviously, we're also kind of migrating to the cloud, so there are some cost savings with that, but also different kind of areas where we need to kind of mitigate risk as well. It isn't a certain metric that we look at, I think, Jerry, more so than what is appropriate given the risk profile of our customers and the transactions and what we're doing. Right. Do you think, given your cross-border activity and being the gateway between the East and the West, that requires a higher level of spend for cybersecurity? Yeah, that's a great question. I don't know if that in itself requires a higher level of cybersecurity spend. I think probably given the different locations that we are in, the different countries, the different jurisdictions. Hong Kong is different than China. Just naturally, it's going to be more than if we were just in the U.S. Right. Okay. Let's shift over. Let me just ask this one high-level question. Do you still think, at this point, you can still achieve positive operating leverage in view of the current rate environment? Yeah, I think so. Certainly, that will help if long-term rates go up or short-term rates go up, better. I think in this current environment, I think that's still possible, with the expectation if you're looking at 2022. Given how your balance sheet is positioned at this point in the cycle, we do have a yield curve steepening. We have the forward yield curve telling us we could get two, maybe even three hikes in 2022. Can you kind of talk about what's most important for an increase in earnings based on your balance sheet and given the shape of the yield curve? Yeah. I think what's most important for us to achieve higher NII would be an increase in short-term rates. Right. Because our balance sheet is largely variable rate, LIBOR, prime based. That would be the most impactful, and I think certainly I'll take the long end of the curve going up as well, Jerry, but I think that would be the most impactful for us. Outside of loan growth, of course. Oh, yes. Yeah. Yes. Separate from loan growth. Right. Right. Okay. Let's talk a little bit about capital management. East West's dividend payout ratio is under 21%, and I know there's an existing share repurchase authorization. Just curious on your thoughts on capital management in general, and then on repurchases more specifically now that the worst of COVID-driven fears are behind us. Well, I think with the worst of the COVID-driven fears that did not manifest themselves, that buyback opportunity sure would've been better before, right? We bought back $150 million worth of our stock in a very short period of time, really before COVID blew up and after we had the authorization. But if I had only had a few more weeks there, that could have been a lot better, honestly. For us. I think for East West Bank, we really believe that we are a growth organization, and that the highest and best use of that capital for our shareholders at this point in time is redeploying that in organic growth. I think making sure that our common dividend is appropriate relative to the EPS growth, relative to peers from a payout ratio, a dividend yield. That's also something that we monitor. I think right now, probably a little bit on the low end relative to many peers. But I think other things, if you look at kind of the hierarchy of the use of capital, well-priced strategic M&A, that'd be something that we looked at. And then of course, some sort of special dividend or return of the buyback. Those are things that we would consider probably in that order, Jerry. Well, maybe we could talk about that, though I think you said well-priced strategic M&A. There's been a lot of discussion from the different banks today about non-bank, fintech-type opportunities, just expanding capabilities. So just curious on what your thoughts are on that subject. Yeah. I think certainly those are things that we'd evaluate from the perspective of, is it an enhancement of our capabilities? Is there a revenue-generating opportunity that we do not currently have, right? Is it strategically alignment of where we're trying to go? I don't think we haven't found anything of size, other than the very small investments that we've made that fits along those lines. But certainly, I think especially related to our cross-border business, that's certainly something that we'll certainly evaluate. Right. Okay. Let's talk about just kind of like what. We've talked a lot about what you guys are doing. Just talk about when you're looking out. We talked about COVID, most of the fears being behind us. Just given your model and the macro environment now, what do you see as the biggest risk on the horizon for East West? Yeah. Actually, Dominic and I had this conversation not that long ago. Last week, actually. In some ways, I think there's so much opportunity for us as far as, look, credit's benign. All of our clients, most of our clients, not all, seem to be doing very well. I think to a certain extent, our conversation was like, we need to make sure that we take advantage of these opportunities that are in front of us right now, and how do we maximize that? I think that this is a. We're in a really great space from being able to, I think, have the size and the scale that we did not before in order to kind of grow customers or achieve more inroads than we've done in the past in certain sectors or areas, right? Larger customers that we're able to service. Now, I think to go back to the conversation about the deposit customers, we have much more larger, sophisticated customers that we know it would've been very hard for us to be able to manage several years ago or a few years ago. Or maybe we had those relationships a few years ago, but their primary operating account was at Bank of America or Wells Fargo, and now they're at East West. I think part of it also, maybe our internal kind of struggles are, as we grow, how do we make sure that we keep the culture, have the rigor, kind of have the ability to kind of operate at the same speed we were able to when we were smaller, right? I think be able to retain ultimately, and I think that would translate itself as far as positive operating leverage. Right? Right. Clearly, when you think, when I've asked about the risk and what you've conveyed is you're definitely more of the mindset of playing offense in this environment. You're pretty excited about all the different opportunities. Just with that in mind, when you think about the regions of your franchise, what is showing the best strength in not only the regions, but the products as well? Yeah. Well, certainly given the kind of the size and the prominence that we have in California, it's still California. But if you look at other regions, as I mentioned, Hong Kong, China, also other states where we have less penetration or scale, such as Texas, also New York. The growth rates are certainly higher, right? We're excited about all these areas. It's really a matter of, to a certain extent like in Texas, we need to scale up a little bit more to make sure that profitability is really there. But the growth trajectory is certainly very positive. Right. And when we're talking about Texas growth, to clarify, we're talking about outside of oil and gas. General C&I, CRE, areas that we have not been growing as much over the last few years. That today we have enough footings, in terms of people and dollars on the balance sheet to generate more and bigger growth. Yeah, and that's an important clarification, Juliana. At this point in time, the oil and gas portfolio, $1 billion commitment, $700 million or so, a lot under that outstanding. We don't expect to grow that, and we have been reducing that over the course of a year. Yeah. Okay, thanks. Just I guess, well, we did talk about risks, and we kind of didn't focus too much on anything particular in credit quality. Certainly, this has been the upside-down recession, right? And credit quality really has been pristine, and there really hasn't been much of any sort of hiccup. I mean, net charge-offs are running at really low levels right now. Can you kind of give us an idea of how sustainable these very low levels of net charge-offs might be and how you're thinking about credit? For the near term, as we evaluate our portfolio, there really are not a lot of issues. There certainly are some loans that we're working out that have been problematic throughout COVID. Maybe some of them were before. Some still COVID-related kind of vacancy issues. But all in all, the credit continues to be very good. So we see that in the near term being an issue. If anything, honestly, I think 2022 may be better, right? If you look at it from a net charge-off perspective. That's interesting. I mean- Not yet. There is a little bit of volatility in the markets. I guess it was last week when some of these non-prime, maybe it was Allied, it was OneMain, there were some non-prime lenders that talked about credit normalizing. And obviously, their delinquencies are ticking up, and they talked about credit normalizing in 2022. And there was a lot of people extrapolating that to any balance sheet financial. You guys are thinking certainly not- and obviously they're different animals, but certainly not 2022 as a normalized charge-off ratio. You don't expect it for East West, anyway. Yeah. I would say at this point in time, I think 2022 will still be benign. I'd like to add the one thing to bear in mind is there's two separate things about the net charge-off ratio and the loss content where we're not seeing it, and maybe how banks approach risk ratings, right? For a while, during COVID, the regulators were very supportive of banks' efforts to support customers, and now we're kind of going back to business as usual in terms of grading loans. So for example, you might see a little bit more volatility in risk grades such as special mention because you have to look at the last 12 months of financials, which would include COVID financials. However, because the outlook for these borrowers is improving, you're not actually increasing the risk or the loss. So there's two different things that you might see. A little bit more volatility on classifications while a benign net charge-off environment. Right. Okay. Thank you. That's helpful. Thank you, Juliana. I'm going to kind of shift gears and ask you something we've never talked about. It's become a very important topic with investors these days. Just kind of how important do you think ESG factors will become for investors over the next five years or so in deciding whether to purchase East West stock or not? How do you think about it? Yeah. We are certainly spending more time on this. I think if I were a betting person, I think to a certain extent, this is important from employee engagement and then also hiring and talent perspective. If it's important to them, seems to be, especially if you're younger. We've gotten more inquiries, I think, from European investors. Jerry, I don't think any of the U.S.-based investors seem to care thus far or enough to reach out. So I think in answer to your question, I'm not sure. Especially, I think there may be some difference as far as where U.S. investors are. I mean, there's no question for banks, in some ways on the governance side with the structures in place to a certain extent for East West in particular on the S side, right? With the social responsibility. In some ways we are very uniquely positioned being a bank where we have a lot of employees who are minorities. Also we support a lot of minority communities. I think that is something actually we are very proud of and that we distinguish ourselves in. All in all, I do not know if for investors in the near term of using this to buy East West stock if it is going to be that critical. The SEC will tell you something else, and I think we are getting ready to try to better understand what those kind of disclosure requirements will be. We are certainly on that as well. Right. Irene, were you talking about potential employees in the younger generation? I am just curious about that. When you are interviewing, Yeah prospective employees, what is important to them? What are the questions they are asking, and what do they want to see? Yeah. This is just my perspective. I think compared to maybe in the past, prospective employees are more interested in a value alignment. Maybe that is ESG related, maybe that is working at East West, the bridge between the East and the West. I think that is more important, in some ways more important than even pay for a lot of our employees. Right. I mean, it is interesting, and that's where it's going to start is with the employee base, I would imagine. Anyway, we are almost out of time. I do not know if anyone has any questions. Sure. Yeah, I think we are good. Juliana, do you see any typed in? Because I am having trouble navigating my screens here. No, I do not see any questions from the web. I think we are good on time. Okay. I really appreciate both of you making time to speak with us today, and hopefully next year we will get to see you back in person here in Boston. We appreciate you accommodating us being virtual. Yeah. Halfway across the world? Across the country? Across the country, not the world yet. We also would like to see you in person next year, Jerry. Thank you everybody in the audience Absolutely for tuning in. Bye-bye. Thank you so much for your support. Bye. Thank you. Thank you.