East West Bancorp (EWBC) Q2 Earnings in Line, Expenses Drag - Analyst Blog

East West Bancorp, Inc.'s (EWBC) second-quarter 2014 earnings of 58 cents per share came in line with the Zacks Consensus Estimate. However, it compared favorably with the year-ago figure of 52 cents.

Results benefited from robust top line, but considerably overshadowed by higher operating expenses. Appreciable growth in loans and deposits along with strong capital ratios were the tailwinds for the quarter. On the other hand, dwindling profitability ratios were among the negatives.

Net income came in at $83.99 million, up 13.5% year over year.

Performance in Detail

East West Bancorp's total revenue grew 15.0% from the prior-year quarter to $279.5 million. Moreover, revenues surpassed the Zacks Consensus Estimate of $250.0 million.

Adjusted net interest income came in at $218.4 million, up 13.6% year over year.  However, net interest margin (NIM) fell 7 basis points (bps) to 4.22%.

Non-interest loss widened 20.2% year over year to $14.9 million. Changes in net reduction of Federal Deposit Insurance Corporation (FDIC) indemnification asset and receivable was the main reason for the significant rise.

Non-interest expense rose to $127.9 million, up 35% from the prior-year quarter. The substantial increase was mainly attributable to higher compensation and employee benefits as well as elevated amortization expense and operating costs.

The efficiency ratio for East West Bancorp increased to 43.98% from 40.40% in the prior-year quarter. An increase in efficiency ratio indicates a decline in profitability.

East West Bancorp's total loans receivable were $20.5 billion, up 26.1% year over year. The growth was primarily due to higher non-covered loans, partly offset by lower covered loans. Total deposits rose 18.6% year over year to $22.9 billion.

Asset Quality

East West Bancorp's asset quality reflected a mixed outcome. As of Jun 30, 2014, non-accrual loans (excluding covered loans) as a percentage of total loans was 0.58%, down from 0.69% as of Jun 30, 2013.

Total nonperforming assets (excluding covered assets) were $161.4 million, up 20.9% from the year-ago quarter. Moreover, provision for loan losses rose 7.2% year over year to $8.9 million.

Capital and Profitability Ratios

East West Bancorp's capital ratios were strong and well above the minimum regulatory requirement. As of Jun 30, 2014, Tier 1 leverage ratio was 8.5%, Tier 1 risk-based capital ratio was 11.0% and total risk-based capital ratio came in at 12.8%.

However, profitability ratios were slightly weakened. The return on average assets declined 5 bps year over year to 1.24%. The return on average common equity declined 3 bps year over year to 12.56%.

Management Guidance

Management expects earnings per share between 58 cents and 60 cents in third-quarter 2014 and in the range of $2.29 to $2.33 for full-year 2014.

For 2014, adjusted NIM is expected to be 3.35%–3.40%. Further, management foresees total loan growth of approximately $400 million per quarter and provision for loan losses of nearly $5 million to $8 million per quarter. Non-interest expense will range from $120 million to $125 million per quarter and effective tax rate will be 29%.

Our Take

Despite the bleak economic environment, East West Bancorp's solid loan and deposit growth is commendable. Also, the company's strong capital position and raised guidance are favorable factors.

However, as suspected initially, the company's inorganic growth strategy has led to an alarming rise in expenses. Also, the company's rising nonperforming assets remain a major headwind for the sustainability of its long-term growth. Moreover, the company needs to rein in its mounting non-interest losses, which can put the top line under pressure.

At present, East West Bancorp has a Zacks Rank #4 (Sell). Among other banks, First Interstate Bancsystem Inc. (FIBK) and UMB Financial Corporation (UMBF) are scheduled to report on Jul 21 and Jul 22, respectively, while Bank of Hawaii Corp. (BOH) is slated to release earnings results on Jul 28.