BancAnalysts Association of Boston's Annual Bank Conference - EAST WEST BANCORP INC

Good afternoon, everyone. We're going to get started with our next presentation. Next up is EastWest Bank Corp., ticker EWBC. EastWest is a uniquely positioned bank that bridges the U.S. and Asian, particularly Chinese, markets. Its deep expertise in cross-border banking, combined with a strong commercial lending franchise in California and other key U.C. markets, differentiates it from other regional banks. assets at the end of the third quarter, $86 billion, with about 106 locations. With us today, very happy to have Chris Morrell-Niles, Chief Financial Officer. Chris was appointed EVP and CFO of EastWest in October of 2023. And then prior to EastWest, he served as the CFO for Associated Bank, a position he held for nearly a decade. And we've been on the stage together at your prior bank. So thanks for coming back again today. Always a pleasure. And then earlier in your career, I always like to mention you were an investment banker at Merrill Lynch as well as Lehman Brothers. Thank you. And then Adrian Atkinson, head of corporate development and IR, is in the front row as well from the company. So same format, I'll kick it off with some questions and then open it up to the audience to see if there's additional questions. So let's just talk with strategy platform Chris. EastWest has built a unique position in connecting markets on both sides of the Pacific. What's driving cross-border business today, and how is East-West positioned to benefit from future flows? So, I think the real driver is, despite all the headlines that we read about, despite perhaps what you might think would be the outcome of the tariffs and administration's policy, U.S. goods imports are at record highs. They're higher than they were in 2016, they're higher that they were under the last administration, in fact, they are the highest today that they've ever been. And the combined goods and services is at still an even higher level of growth. In fact, world trade, despite everything you might read from the headlines, is at its all-time high. And so as we sit here today, we're in this unique perspective that the headlines don't seem to paint the right picture of the actual flow and activity. And if you think about a price-conscious American consumer, and our business is really to fund the lifeblood of the American consumer. The price-conscious American consumer continues to go to Costco, continues to go to Walmart, continues shop from Amazon as a price point leadership sort of retailers, and the reality is we are working with suppliers that are deeply embedded in those systems, in those networks, and supplying them the right goods for the American consumer in today's price- conscious economy. That flow has only continued to grow and you compete with much larger global financial institutions for that cross-border business where can you kind of out deliver those other banks with larger balance sheets bigger scale and essentially why do you clients choose east-west so it's interesting we do compete with a handful of larger global banks but there's 4,000 banks or so in United States, and interestingly, only a handful choose to open themselves up directly to the opportunity to participate in the cross-border flow. There are others that participate in the cross border flow with Canada, others that participates with cross border flows to Latin America. It turns out there aren't that many that have proactively sought to open an office, create a website, or engage with folks that say, we are open to help you with your business in the U.S. the way east-west has. And so it's interesting. You've got an entire Pacific Ocean of opportunity, an entire commerce between the two largest economies in the world, the two large regionals of economy in the word, you've got a franchise that we've built around the ports of entry to the United States, and there are remarkably few folks other than a handful of the largest banks that have chosen to participate in that flow. And so we think it's a bit of a blessing for us in that we are positioned to be helpful. We're helpful to retailers on this side. We're help to importers on this, we're helpful for distributors on this. All of our business is on this slide of the Pacific, but the fact that we can engage with and be present for folks on that side means they know who we are in a way that perhaps only they know the top five or so banks in the US. And that creates an enormous set of opportunities for us. And perhaps we're not gonna capture the Fortune 1000 on the other side of the Pacific, but it's okay, we let the big five guys get that. But the next 10,000 are plenty of opportunity for East-West to participate across a range of industries, across a of range of activity, all inward bound to the US, all driven by the US consumer that wants to pick up that right price point good off the shelves at Walmart or Costco. And so how important are East-West people, market knowledge, local presence, and kind of the ability to operate across cultures? How important is that to your competitive position? Again, if there's 4,000 banks, there's literally less than a dozen that have a presence there of any consequence. And so that puts us in a very attractive competitive set between two very large economies. So you've transformed yourself in the past decade into a commercial bank with significant scale capabilities, which we just talked about. What has remained constant in your strategy throughout that evolution, and then what has changed as the bank has grown? The mission of the bank had been very much a constant. So the mission of bank was to serve the emerging needs of a growing immigrant community, first in Southern California and then broadly across all of the major metro markets where there there was significant inbound Asian immigration. As a son of an immigrant, as the husband of an immigrants, as the father-in-law to an immigrant I've sort of lived my entire life observing the different waves of immigration in the last 50 years or so and I resonate with the mission of the bank which is to make sure that that process of integration to the US economy, to the U.S. citizenship is one that's smooth and hopefully successful for all that come and seek their American dream here. And I think the fact that we're able to not only provide that transition for businesses, for individuals, but then actually finance that American dream home for so many is a wonderful thing and something that I certainly personally resonate with. And so given the strength of your markets, where you are in the US, Where's the greatest runway for growth and will you continue to expand the branch footprint in the future? Yeah, thankfully we're blessed to be in some very large metropolitan markets. We think about those not by accident. We entered those because they were the points of entry, places where goods and people came into the country and then made their way to the American consumer or to the African education system or the American workforce, as it may be. And those markets have turned out to be the magnets for educated workforces, and they've turned out to be magnets for some very significant educational institutions, and they turn out to the magnets for a significant amount of commerce and activity. When you get that, and as it turns out, actually several of those markets are also magnets for technology-driven sectors. And so to take that all together, whether you're talking Seattle, you're taking San Francisco and the Bay Area, whether you are talking some markets in Texas or some markets even here on the East Coast, you take that all together, you have some of the highest income markets with some of highest educated people doing some of most value-added things in the world. Those are great markets to have as your core market. So we are often put in the bucket of being a regional bank, and I've got a regional that covers Boston and Atlanta and Texas and Washington and California and Nevada. I'm not sure how you define that region other than national and, to a certain extent, international, because we're also in Hong Kong and in Shanghai, meaningfully. And when you think about EastWest capabilities of the future, what are the opportunities for future development, the products and services of capabilities that you need to have today or would like to have for your clients? So we've been investing over the course of the last year in enhancing our ability to facilitate cross-border payments more seamlessly for our clients. We've successfully delivered that with direct connection to essentially the entire Hong Kong banking market. So moving money back and forth from Hong Kong has never been easier for our customers and we think is a sort of best-in-class competitive positioning. We're in the process of doing that. We actually just rolled out that solution for our client in mainland China as well. And so I think you'll see, hopefully, accelerating trends from that. And what we really expect that to bring will be a further development of our foreign exchange business. Because the ability to do that seamless, timely transfer of funds really then facilitates the ability to do a related or next step FX transaction. And that's what we're looking for. And so the ability be, again, this bridge between East West, firmly centered, 95 or so percent of our balance sheet is in the U.S. It will always be the case. But the ability to have that bridge connection to the other side and be able to be this facilitator of payments drives our commercial deposit fees, drives our foreign exchange activity, and has been a nice tailwind given the growth in trade that we've seen over the last decade. And you talked about this on the call. The mainland China program, you said, would contribute to fees in the fourth quarter and more so into 2027 what can you size up the opportunity and and how large that could be look I think we've seen growth in our fees broadly commercial deposit fees at the double-digit approaching rate from the activities we've done in Hong Kong we would expect a similar positive momentum into 20 27 we haven't given guidance on managed income and I'm not doing so here today but I don't think it'll be it won't slow us down for sure okay just remind us what is structurally different about east-west operating model that allows you to be extremely efficient and is that sustainable as you continue to grow yeah I think our strategy around these ports of entry market allow us to be very focused on where we place branches and generally speaking our branches are exactly where people expect us to and so if you're looking for you know I sometimes refer to this, jokingly, as a Louis Vuitton strategy. If you're looking for a Louis Vuiton, you probably know you're going to find one on Fifth Avenue, Rodeo Drive, or the Miracle Mile. You don't have to think too hard about it. You don'T have to look it up in advance. You just go there. You'll know you'll find one. If you'RE looking for East West Bank, you know where to find it. All customers know where they'll find it, and you'll know where you'll get it. We don't know where we're going. We don'T know where We don' t have to advertise on billboards or commercials. Our customers know exactly where we are. They shop next to our branches. they go to restaurants down the street from our branches they walk by our branches every time they go the markets and places that they otherwise frequent and we're exceptionally well-known within our markets and so our structural advantage is we don't have to be everywhere we just need to be where people expect us to be which means we have a lower footprint which means have more deposits per branch which means we have more deposits per FTE and that structural advantage combined with the fact that our advertising costs are lower means that we have a better cost to income ratio than most banks competing in almost all the markets we serve and then as you enter the next phase of growth with a look at the balance sheet strong capital strong liquidity position how does your balance sheet position influence how East West thinks about its strategic options and and really its ability to grow and claim clients. So when I step back to an earlier question and say, you know, who do we really compete with in some of this business, the reality is we compete with the largest banks in the world, which are broadly perceived as too big to fail. East-West is not too big to fail, and so we have taken the position that in order to be competitive, to allay our customers' concerns, to make sure they understand when something goes bump in the night for some other regional bank, that they don't need to worry about east-west we've taken a position trying to be too strong to fail that means we have higher capital ratios almost as an advertising cost and that works that works for our clients that works for communications internally that works for our CEO most importantly and he's very comfortable keeping and intaining a 10% tangible common equity ratio particularly as long as we're delivering top quartile returns, and the most recent quarter was 17.2%, and I think it's a pretty attractive top quartel level of returns for the industry. And as long as we're delivering top quartet returns, he has no concerns maintaining that capital as an advertising cushion as part of the business plan. And it's been successful for him for better than three decades now with a similar philosophy. And so I can't fault the plan because it's really worked exceptionally well. In fact, I think I've pointed it out from time to time, Dominic took the bank public in 1999, and in that 26-year period, EastWest Bank has outperformed the QQQs, which people don't necessarily connect those dots because they're not obvious, but it's interesting. Happening again today. How are you thinking about the $100 billion in the midst of this? evolving regulatory guidance you know what do you understand is the requirements to be at this point today and then how do you is this contemplated in your expense run rate yeah look we've had an expense run-rate of roughly an eight percent CAGR over the last several years thankfully we've the revenue CAGR that has exceeded that consistently and so you know we look forward to continuing that to the extent we can but we would expect expenses to stay on this general trajectory. We'll give formal guidance, obviously, in January. But, you know, I don't think it's going to slow down as we approach 100. I don'T think it'S going to SLOW down as we continue to invest in businesses that are more fee-oriented. But we'LL do so, hopefully, with revenue that will also offset that expense growth and allow us to show continuing positive operating leverage and continue positive momentum for our shareholders. Dominic has over a hundred and ten million reasons to be perfectly aligned with delivering shareholder value. I think he'll make sure that our plans reflect that. With regard to, I think that's sort of the first of your question. Yeah. The ten billion dollars? You know, I think we have done a lot of work to get to where we are. We are at 86 billion. We sort of see the hundred billion out there. We've heard from a A number of folks in a number of different places that that threshold may move. Haven't seen it happen yet, but we're optimistic. But we also understand that some things will be regulatory and supervisory judgments that may very readily be moved. And some things have already been codified in the CFRs. And as someone put it to us, may require an act of Congress actually to change, unless the Fed takes a very different view of what its discretion is. And so if that's the case, then much of what's in Reg YY, the stress testing, and maybe much of which is in Reg W with regard to HQLA and LCR might stand at 100 billion because that's already been codified. And so we think we approach this with humility, not fully understanding where all the powers that be will bring us to bear, but being prepared to be the most resilient bank we can be. And I think we're very proud to be amongst the most well-capitalized and most liquid banks, which means we approach this from a perspective of probably not having to change our business model to be able to pass stress tests, and probably not have to change our business models to be to pass liquidity tests. Because when you start with being one of the most liquid and most well capitalized banks, you probably have a good starting point for whatever comes next. Right into my next question. You've built up this reservoir of liquidity in the investment portfolio. Can you just explain your thought process and behind the build and then how you're thinking about on balance sheet liquidity going forward? It's never been a better time in the last 20 years to buy bonds. Seemed like a perfect idea. Okay. I mean, there used to be a quip, Terry, you probably remember this, you know, California thrifts would take deposits at three, make loans at five, and California bankers would be at the beach or on a golf course by three, right? Three, five, three. I don't think Dominic is going to allow me to get to the beach or golf course at any time in my career with him. But taking deposits at 3 has been viable. I think our weighted average cost of funds last quarter was $281 on the interest bearing. it's been rare for me to be able to invest in a Ginnie Mae security with zero risk rate and earn better than five percent like I can now and that means it's pretty easy to maintain a three percent margin even if not much else is going on in the world and you know there's other stuff going on in the we have but it's a pretty easy starting point to be a banker if you're somewhat risk and have a high high appreciation for liquidity maybe one more question then I'll open up to the audience rates have moved higher expected to continue to move higher mortgage activities slowed down that really hasn't been the case at east-west so just kind of remind us of your differentiated mortgage mortgage product and market position and essentially how you're able to kind of keep that growth going the bank's founding product back in the early 70s was to meet the needs of immigrants at that point in time in Southern California looking to buy into the American dream, looking to buy that home in what was not too many years after Brown Board of Education and sort of social redlining that was active and pervasive across many markets. And so the bank stepped in to create the right environment, to create the financing to allow those folks. But traditional underwriting didn't often apply well and the program landed on well if you can put half down we will help you with the other half and over a 50 plus year period that program has worked out really well and what's interesting is if you think about the more recent years of that program while it still is attractive for our immigrant communities it's also attractive for anybody with episodic income so think anybody filming a Netflix episodic series or think about anybody filming a movie where they make money for a year and then they don't or they make money for five years and then don't. Those income flows don't often work very well in traditional underwriting models but at EastWest if you can put half down we can help you find the other half and put it in place and an interesting byproduct of that is folks that are attracted to that product are sort of structurally definitionally less rate sensitive because they're only borrowing five-eighths as much at most and in some cases even less and so the reality is it becomes a less rate-sensitive more consistent product for a niche customer that has outperformed all the credit boxes that I'm aware of for more than 50 years and so it's a product that works really well for us and for the customers that find value there and that niche is one that we have continued to grow. It was the largest source of growth for our loan portfolios in the third quarter and it will likely be in the fourth quarter as well, despite perhaps others mortgage slowdown. I also note that it's our least concentrated subset of our portfolio and so you know we think Dominic strives to be diversified in everything we do and if I think about the relative weights of CRE and CNI we're relatively underweight and single family and consumer so doing more there is helpful to overall diversification at the end of the year, you have a Lunar New Year? Yeah, so the Lunar new year will be a next year first quarter event, really kind of February-centric. I think the interesting question is what happens to market rates broadly between now and then. What we observe today is that our current CD specials, which are at 3.68 for six months, 3.78 for nine months, and 3.88 for 12 months, markedly below, perhaps, marketplace levels. 50, 75, 87 basis points below what customers could probably go online to Schwab and Fidelity and find as alternatives. Despite that price discount, we are maintaining our CD balances. Now, will that hold if rates are another 25 or more basis points higher by the time we get to February? We'll see, but right now we're able to retain that flow at a very attractive level for east west as a funding source without having to pay full market rate and we appreciate our customers loyalty and restraint during this interesting time on the dda side where we have put an emphasis on growing the balances we've had i think what can only be termed as remarkable success we sort of changed the way we incented folks we changed the the way we gold folks last year that had a positive effect so we sort of doubled down going into this year and the outcome has been fabulous and so I give credit to our retail team who has gotten everybody they could out from behind their desks walking up and down whatever Broadway Main Street Valley Boulevard is relevant to their particular neighborhood 8th Avenue Bowery Canal street or wherever else you might be and gotten people engaged one-on-one with the merchants in their communities with a outsized positive impact and one that actually is providing benefits you know we look back at the cohort that we brought in the second and third quarter last year of those small business DDA customers and their balances are up so normally you'll see account attrition first-year attrition can be higher than most years attrition and so sometimes Sometimes you don't see balanced growth year over year, and in this case we've seen significant balanced growth from that same account, same cohorts, year over years, which means not only did we get them to open the account, we got them to fund the account. We got them use the account and we've either picked the right merchants that are growing with us or they've just brought in more money from other places to make it even more impactful, all of which is great news for us and one that we're leaning into as best we can. We've had two. Ladies first. Oh, gentlemen. Hi, Janet Lee from TD County. On the organic RIA build-out, how long do you think it takes to really get a scale? You already have existing, very affluent customers that are using other firms like Schlosser and Morgan Stanley and whoever. I know that it could be that getting the right talent better by label on the website may be a bottleneck, but at what point could it be meaningful? Can this start to become meaningful next year, or is it more of a multi-year build-out? Bill, I have a question about the timeline. Yeah, so I think two layers to that question. One is, yes, it is challenging to find the right people with the right licenses, with the rights backgrounds, and the right language skills or other skills to be positively successful and impactful with our higher value ad customers. And so we're being very careful about that selection process and about that onboarding process. But to your broader point, I think the reality is this is the opening innings of what could be a 30-year strategy for us of substantial growth. Today, Hong Kong has emerged as the world's largest offshore financial center. It is larger than Switzerland as an offshore financial center for asset managers, assets, et cetera. And the reality as a sum of that money will find its way to the United States, and when it does, We will be exceptionally well positioned, along with some very large finance solutions that have presence in Asia as well, but we will be amongst those, a dozen or so, that we're positioned to capture some of that inward flow into the American markets, and we see that as a positive. Today, Hong Kong is one of the leading IPO markets by number of IPOs, which means that there's a constant flow of business activity and capital that is being freed up into the international marketplace, and some of those companies will find reasons to move that capital and to invest the capital to direct operations, otherwise allow that capital to come to the American marketplace. And if it does, we will be uniquely positioned again amongst maybe a dozen folks that will be participating in that flow. And so when we look at the opportunity, it's not a let's hire a bunch of folks and see what we can do with it. It is how do we capitalize on this likely multi-decade positive flow of activity that will come from the maturation of the second largest economy in the world and its transition to, perhaps at some point in time, more ready capital flows, or the flow of those capital into other investment opportunities, which we think the U.S. will feature prominently amongst because, well, it has for every other global investor, so it probably will be here too. And so it's beginning of a very long journey, but one that we take great care in making sure we find the right people to help us build. We spent the better part of two years trying to find the partnership to strike or buy and turn to the do it ourselves because we couldn't quite find that right partnership and we'll be very careful again to build the franchise around the right people and the right processes to make sure we're doing it the right way but also in a way that meets the needs of our most sophisticated clients today and the needs of what we expect to be a larger subset of clients in the future, a much larger subset clients in future. Hi, Ryan Penny with Morgan Stanley. You mentioned you like bonds, it's a good environment. Bonds can easily earn 3% of them. Any changes when you're thinking about the securities portfolio strategy? Any more willingness to take duration or do the HTM book, which historically wasn't as large for you guys, any change at all? No, we are a high quality liquid asset shop. I think we're 97% HQLA. I think have more floaters than most, which has turned out to be a blessing. And I think will stay focused on the investment portfolio as a liquidity portfolio that sits there to help us to maintain the credibility as one of the most liquid banks in the country, which we think is a very strong place to operate from. That's a follow-up to the last conversation around the wealth business. It seems like you're leaning more into building it organically, and my sense is that historically EastWest has been more transactional in nature, structured products, less so on the advisory side. of strategy to maybe build out different products like advisory and gain share there? It seems like you're doing more on the mortgage side. Could you just walk us through what the future of that business would look like? Yeah, look, I think there are clients that I have met at the bank, that I've been with the bank for over 40 years. So I don't know that transactional is the way I would ever describe the relationship model at EastWest. I think the reality is, is we've provided mortgages to folks who have actually, much to my surprise, kept them and paid them off after a full 30 years, which other banks that never thought that was possible, but they do at EastWest. And so I don't see us as a transactional bank. On the wealth side, our capabilities, since we didn't have an RIA before, were limited to a brokerage model, which was commission or transaction-based, which is why we knew we had to build out a different capability set so that our relationship clients could feel that we were operating consistent with them, and either a fiduciary model or at least an advisory model that they felt comfortable with over the long haul, which is why we ultimately decided to create our own RIA and move to that fee-based model as opposed to the commission-based models. So I think this is a further deepening of East-West relationship orientation with our best clients in a way that we think will be very positively received. I'll continue on. I guess the question I should ask is, you talked about why you maintain high capital levels. Can you just talk about capital priorities? So that's the question I should be asking. The question I want to ask you is, how could M&A and depository acquisitions be a part of that capital allocation? Sure. It's not that we haven't looked, and it's not that people haven't sometimes come and knocked on Dominic's door. it's just that we haven't found the right opportunity that would allow us to leverage our capabilities more effectively in partnership with one of those opportunities that became present so i think dominic likes the idea of being this exceptionally well-capitalized bank helps him in his communications with colleagues with customers i think he also knows it affords him the flexibility to consider things at times perhaps stressful times that others can't consider and I think he puts a value in that optionality perhaps a slightly higher rate than some others and so he's prepared to carry that I think there was commentary from the gentleman here from five trillion dollar bank this morning and you know he kind of made the same comment about Jamie Diamond's approach to capital I think Dominic has observed that over the last three decades and has a similar view on some of those values to being prepared, always being prepared for what you don't know and I think Dominic knows well enough that he doesn't know everything and he knows that I don't and therefore he wants to be prepared for everything and so whether it's stress testing or whether it just having a little cushion he feels more comfortable operating from that perspective and over the long haul he's build the business model that allows him to because it's more efficient, because it's actually a simpler business model in many ways. It allows him to have this flexibility in a way that it's more difficult or challenging for others who have a higher cost structure or more complex product sets to compete with. And it's interesting that we're internationally active at the margin bank but with a simpler business model, but the reality is we are. We focus on limited sets of geographies and limited product things that we do exceptionally efficiently and exceptionally well and it's proven out over several decades so other large banks up here today have credit card products have high relative service charges you know why is that not a part of east-west growth strategy I think we have less than 1 million dollars a year to date of overdraft fees and a smallish number of service charges, in part because our customers generally maintain balances well in excess of any minimums that we ask them to maintain. And so we have the benefit of a fairly affluent client base writ large that is a saving-oriented client base that maintains notable balances per account. So in addition to having perhaps more balances per branch, we can observe anecdotally that we also have more balances per customer than most banks, and that's an unmitigated good thing, because that means there's fewer checks per customer, there's few ATM visits per customer. There's fewer branch visits per customers, and it means our cost to deliver to those customers relative to our balances is lower, which translates into higher ROAs and ultimately higher ROTCs, which is why we deliver a 17% return on capital, even when we maintain 10% tangible capital. Okay. Any other questions? If not, I'll continue. Maybe a follow-up on Jared's question on, I think it was CD pricing. On the call, you talked about deposit costs have been well-contained in in the first couple weeks of the fourth quarter. That was several weeks ago you made that comment. Care to provide an update, fast forward through today? They continue to be reasonably content. Okay, appreciate that. And then other banks up until recently have been shrinking, CRE. How are you thinking about the commercial real estate business? you mentioned the concentration earlier in our conversation i think we've been focused on growing the other planks of our business growing our cni business which has been fairly attractively growing for the last several years and growing our single family business right now single family growth is coming in stronger and when we see sort of some of the dynamics in the cni book what we recognize is twofold one is we are continuing to grow our direct bilateral general business activities, but we're also seeing, as rates have moved higher, less and less of the NDFI or third party lending or third party leverage as a demand force driving balance growth. In fact, we've seen it be a net negative. So mortgage warehouse lines, as an example, if people aren't drawing traditional 80% LTV mortgages at the rate they were, then there'll be less mortgaged put on mortgage warehouse lines and NDFI mortgage credit will start to shrink. You've seen that across the board and you know we have about a billion dollars of such credit and it's shrunk for us too. If private equity looks to leverage its purchases and its activities and the cost of that leverage goes up they pull back from that activity then the amount of incremental draws on capital call lines also comes down over time and we've seen that happen as well and if business credit funds are out of favor and there's no new money going into new funds or less leverage being applied to those particular investments then business credit and DFI comes down broadly as well as everything else that's got leverage in it and that is a shrink and we see that happening across many NDFI portfolios and you know our portfolios are not immune from that shrinkage and so we're offsetting that by focusing on the core bilateral commercial things where we have the direct relationships, and in the long run, that's the better place for us to focus anyway. Great. So with that, I think we'll wrap it up. Thank you, Chris, and thank you, EastWest Bank. Thank you very much. Appreciate it.