Q4 2020 East West Bancorp Inc Earnings Call
Good day, and welcome to the East West Bancorp fourth quarter, and full year 'twenty 'twenty financial results Conference call.
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Thank you Sarah good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the full year and fourth quarter of 2020 with me on this conference call today are Dominic Inc. Our chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer.
We would like to caution you that during the course of the call management may make projections or other forward looking statements regarding events or future financial performance of the company within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1995 East forward looking statements may differ materially for the actual results due to a number of risk.
And uncertainty.
For a more detailed description of risk factors that could affect the company's operating results. Please refer to our filings with the Securities and Exchange Commission, including our annual report on form 10-K for the year ended December 31, 2019. In addition to some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our full year for range.
The reconciliation of GAAP to non-GAAP financial measures. During the course of this call we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available on replay format on our Investor Relations website, I will now turn the call over to Dominic.
Thank you Julianna good morning, and.
And thank you everyone for joining us for our full year and fourth quarter 2020 earnings call.
I will begin the review of our financial results with slide three.
Although our presentation.
This morning, we reported full year 2020, net income of $568 million or $3 97 per share for it.
1.16% on assets and 11, 2% on equity what are you.
Thanks for the unflagging commitment of our associates.
We are successfully navigating the COVID-19 pandemic.
And the resulting economic crisis.
And also the low interest rate environment.
The fourth quarter was a strong end to the year and resulted in net income of 164 million for.
$1 15 per share increase.
<unk> increased by three quarter by 3% quarter over quarter.
Fourth quarter return on assets was one 4% and return on equity was 12 four five per cent.
In Q4, we earned.
251 million of pretax pre provision income on total revenue of $416 million.
Quarter over quarter, our revenue grew by 10%, reflecting loan growth and higher fee income.
Our pretax pre provision income grew by 12% and our pretax pre provision profitability ratio expanded by 12 basis points.
For 149% in the fourth quarter.
Up from $1 seven 8% in the third quarter.
Importantly.
We saw.
Across the board improvement in our asset quality metrics.
Such as declining deferral and delinquency rate.
Lower net charge offs and decreasing nonperforming and criticized assets.
The macroeconomic outlook for post pandemic recovery has been steadily improving.
And as we begin 2021.
We are optimistic about a year ahead.
And now <unk>.
Moving to slide for for a summary review of our balance sheet.
As of December 31, 2020, total loans reached a record high of $38 4 billion growing by 10 per ton annualized from September 30, and by 10% year over year from December 31 2019.
Paycheck protection program PPP loans total $1 6 billion as of December 31, 2020, a decrease of $204 million from September 30, due to forgiveness of loans by the S. P. A.
We are participating in the current round of PPP to support our customers and communities.
And as of yesterday.
We funded over 2006 hundred new PPP loans totaling over $380 million.
Excluding PPP.
Total loans grew by.
1.16 billion in the fourth quarter.
This reflects growth in all of our major loan portfolios for.
Quarter loan production was broad based and came from across.
Our various lending teams and branch network.
Diversified by loan product industry.
The AGA free and property type.
We think that this lays a strong foundation for the coming year.
Deposit growth was exceptionally strong in 2020 as of December 31.
Total deposits reached a record high of $44 9 billion.
Growing by 30% annualized from September 30.
And by 20% year over year.
In particular.
Non interest bearing deposit reached a record $16 3 billion as of December 31, 2020.
Throughout two that.
2020.
Growth in noninterest bearing deposit balances outpaced total deposit growth.
Noninterest bearing demand deposits made up 36% of total deposits as of December 31, 2020 up from.
30% a year ago.
So similar to loan growth deposit growth was well diversified across our commercial teams and branch network <unk>.
Including cross border clients, reflecting the addition of new customers and expanding wallet share of existing relationships.
We look forward to the strong momentum in core deposit growth carrying into the coming year.
Turning to slide five.
You can see that we ended the year with a common equity tier one ratio of $12 one per cent and a total capital ratio of 14, 3%, providing us with meaningful capacity for growth to support our customers.
Our book value and tangible equity per share with both up 3% from the prior quarter.
And our tangible equity to tangible asset ratios remain at nine 3% as of December 31, 2020, compared with September 30.
Year to date.
<unk> tangible equity per share by 9%.
Given our strong capital ratios and positive earnings growth and trajectory.
I'm pleased to announce that east West Board of directors approved a 20% increase to the quarterly common stock dividend.
From 27 and half cents per share to <unk> 33 per share.
Equivalent to an annual dividend of $1 32.
The new dividend will take effect beginning in the first quarter and is payable on February 23rd 2021 to stockholders of record on February nine 2021.
Moving on to a discussion of our loan portfolio beginning with slide six.
C&I loans outstanding excluding PPP book.
$12 1 billion as of December 31, and total C&I commitments were $17 1 billion.
Quarter over quarter, C&I loans outstanding ex PPP grew by 18% annualized.
Fourth quarter C&I growth built on the positive momentum in pipelines and commitments that began in the third quarter.
In 2021, we expect C&I growth to be stronger in the second half of the year.
Compared with the first half.
The anticipated post pandemic economic recovery takes hold.
Fourth quarter C&I growth was well diversified by industry with notable commitments growth in general manufacturing and wholesale.
Private equity.
Entertainment.
Food related industries and clean energy.
Further diversifying our C&I growth was growth from our greater China portfolio.
Which was $1 5 billion as of December 31.
In the fourth quarter loans in the greater China grew by $160 million accelerating from growth of $82 million in the third quarter.
The utilization rate of loans outstanding to total commitments was.
75% as of December 31, 2020.
Essentially unchanged from September 30.
Yes.
Moving to slide seven and eight which shows essential details of our commercial real estate portfolio.
Total commercial real estate loans were $14 8 billion as of December 31, 2020 quarter over quarter. This portfolio grew by 4% annualized from September 30 per.
Presently this is a slower growing portfolio.
Reflecting our conservative underwriting in the current environment and a lower level of transactions in the market.
For new deals and for refinancing.
We expect to see relatively slower growth from commercial real estate in 2021 until you'd anticipate.
Post pandemic economic recovery gains momentum.
On slides nine and 10, we provide details regarding our single family residential loans and home equity lines.
During the fourth quarter, we originated $1 1 billion of residential mortgage loans.
An increase of 38% compared with $768 million in the third quarter.
This was a record quarter of residential mortgage originations for east West.
And we are seeing the momentum continue in January.
As of December 31 single family residential loans were $8 2 billion up by 20% annualized from September 30.
Home equity lines outstanding were $1 6 billion as of December 31 up by 23% annualized from September 30, including unfunded commitments.
Total mitman on home equity lines were $3 4 billion at December 31.
And the utilization rate was unchanged quarter over quarter at 48%.
I will now turn the call over to Irene for detailed discussion of our asset quality income statement I read.
Thank you Dominic I'll start by discussing loans on Covid related deferral on slide 11.
December 31, 2020 loans in full payment deferral or one two percentage of total loans.
Down from two 7% as of September 30th including loans on partial payment deferral, which generally modifications of P&I payments are interest only.
Deferred loans for the six.
<unk> million dollars of total loans.
Down from four 2% as of September 30th.
Quarter over quarter, non non COVID-19 related deferrals decreased by 36% between September 30th at December 31.
The largest improvement was in our commercial real estate loan brokers, which decreased by $451 million or 29% since September 30.
As of December 31st the deferral rate on CRE was down to under 5%.
Deferrals on residential mortgages decreased by 35% in fourth quarter net for.
For all rate on residential mortgages was two 5% the day.
<unk> rate on C&I loans continued to be very low.
Turning to slide 12 for a review of our asset quality metrics on slide 13 for a review our allowance for loan losses.
Along with a decline in COVID-19 related deferrals very pleased with the across the board improvement asset quality metrics this quarter.
Quarter over quarter criticized and nonperforming assets declined.
Related asset quality metro ratios improve.
The outlook for an economic recovery continues to strengthen our borrowers have proven to be resilient and adaptable.
We're comfortable with the credit risk in our portfolio and believe that credit costs.
101 will be net.
Nonperforming assets were 45 basis points of total assets as of December 31st in the amount of 225 million a quarter over quarter decrease of 10%.
Non loans 30 to 89 days past due were $51 million or 13 basis points of total loans as of December 31.
A quarter over quarter decrease of 40%.
<unk> loans for $1 2 billion as of December 31, a.
Three two percentage of total loans at quarter over quarter decrease of 18% for one 5 billion as of September 30th three nine percentage of total loans.
Within that both classified and special mention loans declined quarter over quarter and respective ratios improve as of December 31, 2020 classified loans decreased to one seven percentage of total loans and special mention loans decreased to one five percentage of total loans.
Criticized C&I loans, we're diversified by industry and the criticized commercial real estate loans were likewise diversified by property type.
Largest concentration within criticized loans, either industry or property type remaining oil and gas quarter over quarter.
Criticized CRE loans decreased by 90% and criticize CNI loans, excluding oil and gas decreased by 18%.
Criticized oil and gas loans were 324 million as of December 31, a quarter over quarter decrease of 74% or 19% $74 million excuse me a 19% reduction in these loans came from exits pay downs and have great oil and gas loan.
Charge offs were under $1 million in the fourth quarter, the backdrop for the oil and gas borrowers has strengthened with higher commodity pricing and demand.
On Slide 13, we review there are components of our allowance for loan losses.
Our allowance for loan losses totaled $620 million as of December 31, or 168% of loans held for investment excluding PPP loans compared with $618 million for $1 73 as of September 30th and compared with $483 million.
139 on day, one post diesel.
Year to date 2020 post day, one of diesel we added $137 million to the allowance largely due to the deterioration in the economic forecast due to COVID-19.
However, the economic forecasts have improved in the second half of 2020, resulting in modest decline in the required allowance coverage for all of our major loan portfolio classifications.
Macroeconomic conditions continue to improve and credit quality holds or improves we expect to see continued reduction in day required loans ratio.
During the fourth quarter, we reported $24 million provision for loan losses compared to $10 million in the third quarter.
Quarter over quarter increase in the provision was primarily due to fourth quarter loan growth of over $1 billion, excluding PPP loans. The other loans drivers Inc.
Excluding the improved macro economic forecast lower deferral rate on commercial real estate and reductions in adversely graded delinquent nonperforming assets.
Our oil and gas exposure and certain charge offs largely offset each other.
Net charge offs in the fourth quarter were $19 million, a decrease of 22% from 24 million in the third quarter.
Fourth quarter net charge off ratio was 20 basis points of average loans annualized and improved six basis points from the third quarter.
For over quarter increase in commercial real estate charge offs in the fourth quarter was more than offset by the quarter over quarter decrease in C&I charge offs fourth quarter charge offs from oil and gas loans total under $1 million.
And now moving to a discussion of our income statement on slide 14.
In this slide we summarize the key line items of the income statement, which I'll discuss in more detail on the following slides.
Fourth quarter 2020 included some non-GAAP adjustments related to the 2019 write offs of DC solar tax credit investments, which added 3 million or <unk> <unk> per share to earnings.
Fourth quarter amortization of tax credit and other investments included $11 million of recoveries related to DC solar and for quarter and income tax was elevated by $8 million of tax expense related to DC solar.
Largely as a result of D C solar related items, the effective tax rate for the fourth quarter was 23% compared with 19% in the third for 'twenty.
Effective tax rate for the full year, 2020% to 17% compared to 20% for 2019.
I'll now review the key drivers of our net interest income and net interest margin on slide 15 through 18, starting with average balance sheet growth.
Fourth quarter average loan growth.
For quarter average loans of $37 7 billion grew by $565 million or 6% linked quarter annualized led by growth in residential mortgage followed by C&I loans, excluding PPP and commercial real estate for.
Average deposits of $44 4 billion grew by $3 2 billion for 31% linked quarter annualized driven by very strong growth in noninterest bearing demand deposits, which grew at a rate equivalent to 56% annualized.
All other deposit categories, excluding Cds also growth.
The strong deposit growth we ended the year with an average loan to deposit ratio of 85%.
Average available for sale debt securities increased by almost $1 billion from the third quarter as we deployed some of our cash late in the quarter. We also added $250 million for repo assets, we did.
Did not yet show up in average balances it continue to deploy excess liquidity into a F that securities book.
But given the low interest rate and the flat yield curve attractive opportunities are limited.
In October of 2020, we utilized our excess liquidity to pay off and for the PPP Lf.
$1 1 billion as of September 30th 2000.
And the second quarter of 2021, you have $400 million I think there'll be advances maturing at a rate of 225.
On Slide 16, you can see in our fourth quarter 2020, net interest income of $347 million increased by $27 million or 7% linked quarter and a net interest margin of 277 expanded by five basis points from the prior force.
Excluding the impact of it.
P loans and the Pvp L. A fourth quarter adjusted net interest income of $333 million increased by 5% or $5 million quarter over quarter and fourth quarter adjusted net of $2 76 compressed by one basis point from the third quarter.
PPP loans.
Interest and deferred fee income was $14 into the fourth quarter up from 8 million in the third quarter and the third quarter. We adjusted the deferred fee income to account for the slower than anticipated forgiveness and payoff for these loans as of December 31, we had $13 million of deferred east.
One last year.
Loans left to accrete in 'twenty 'twenty, one plus of course, the interest income, 1% under TTP loans outstanding dominant share of the month to date funding of new PPP loans early on the call based on that and applications in process, we expect to fund approximately $650 million of Nu.
P loans in 2021, generating approximately 20 million of growth PPP income.
Plus interest.
The five basis point quarter over quarter increase in the fourth quarter GAAP NIM breaks down as follows up six basis points from a lower cost of deposits of five basis points for more PPP income up one basis point from the payment of the PPP Lf partially offset.
Down six basis points from excess liquidity in the form of more lower yielding assets and also down one basis point from lower loan and other.
Earning asset yields turning to slide 17 fourth quarter average loan yields of $3 68 expanded by eight basis points from last quarter.
Excluding the impact of PPP, the fourth quarter adjusted loan yield of 369 contracted by one basis point quarter over quarter <unk>.
Exhibiting relative stability the downward repricing of our variable rate loan portfolio is behind us.
In the upper right quadrant, we laid out our average loan yields by portfolio as you can see our single family residential mortgage product is at least.
Rate sensitive portfolio and continues to carry attractive EBITDA.
Turning to slide 18, our cost of deposits continued to decline in the fourth quarter as maturing higher rate Cds repriced to current market rate, we expect to continue to reduce our cost of deposits as time deposits maturing in the first quarter of 2020 reprice lower our.
Our average cost of deposits for the fourth quarter dropped to 25 basis points.
Down from 33 basis points in the third quarter, an improvement of eight basis points spot rate of total deposits as of December 31st of 22 basis points month to date in January the spot rate is down another two basis points to 20 basis points.
Our fourth quarter average cost of interest bearing deposits dropped to 40 basis points down from 50 basis points in the third quarter, an improvement of 10 basis points the spot rate of interest bearing deposits as of December 31st was 35 basis points month to date in January the spot rate is down another three basis points.
To 32 basis points.
The average cost of Cds in the fourth quarter was 74 basis points, we have $1 3 billion of Cds maturing in the first quarter at a blended rate of 120 channel the rate paid on originations or renewals of domestic Cds in the fourth quarter of 2020 was 25 basis points compared to 40.
Three basis points in the third quarter month to date in January this rate ticked down to 22 basis points.
Moving on to fee income on slide 19, total noninterest income in the fourth quarter was $70 million compared with $54 five moving into third and for the quarter over quarter increase was driven by a number of factors, including a favorable change in the credit valuation adjustment of interest rate contracts and increase in customer driven and foreign exchange.
<unk> transactions and an increase in net gains on sale of SBA loans further treasury management fees continued to grow nicely as we grow our commercial deposit accounts and transactions moving on to slide 24th quarter noninterest expense was $179 million, an increase of 4% linked quarter.
<unk>.
Excluding amortization of tax credits and other investments and core deposit intangible amortization adjusted noninterest expense was $166 million in the fourth quarter, an increase of 7% quarter over quarter, and essentially flat year over year the quarter over quarter change in operating expenses was primarily driven.
And by increased bonus compensation accrual and increased Oreo expense, which was included in other.
Fourth quarter adjusted efficiency ratio was 39, 8% an improvement from 48% in the third quarter over the fast path for.
Our efficiency ratio has ranged from 38, 3% to 48% despite operating headwinds from the Covid pandemic related economic slowdown and near zero interest rate.
And with that I'll now review our outlook for 2021.
On slide 21.
For the full year 2021, we currently expect year over year loan growth, excluding PPP of 6% to 8% for context loan growth, excluding PPP for 6% in 2020, and seven 5% annualized for the second half of 2020, we expel well diversified growth in <unk>.
'twenty, one coming from all of our major non portfolios the diversification of our loan portfolio in terms of non type industry real estate property and geography allows us to outperform our peers in terms of loan growth here in Europe.
Year over year, adjusted net interest income growth, excluding PPP generally in line with loan growth on a full year basis underpinning our interest rate interest income assumptions is the current forward interest rate curve.
Adjusted non interest expense growth, excluding tax credit investment amortization of 3% to 5% year over year in the current environment. We are focused on net interest income and pretax pre provision income growth for.
Provision for credit losses to range between 70 and $80 million.
The loan book debt, we expect further improvement in the economic forecast this provision outlook anticipates that the allowance coverage of loans will continue to modestly reduce from current levels.
Full year 2021 effective tax rate of approximately 15%, including the impact of tax credit investments there will be quarterly variability in the tax rate due to timing of tax credit investments placed into service.
With that I will now turn the call back over to Dominic for closing remarks.
Thank you Irene in summary, we had a strong finish.
Most unprecedented year.
There has been a challenging year for many and I wish to thank all of our associates for their commitment and dedication.
To meeting our customers' banking needs.
As I said at the beginning of my remarks.
We are optimistic about a year ahead.
Including the expected additional government stimulus to rebuilt businesses and communities.
Enhanced support for public health.
And a broader distribution of COVID-19 vaccine.
In addition.
We're looking for to an improvement in the discourse between the U S and China.
Which will be constructive for cross border capital flows and accordingly for our clients business opportunities.
We have strong capital and liquidity to support balance sheet growth as the economy recovers.
And we are confident that we will be able to deliver another year of strong financial performance for our shareholders in 2021.
I will now open up the call to questions operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
So withdraw your question. Please press Star then two please.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Yes.
Our first question comes from Ebrahim <unk> with Bank of America. Please go ahead.
Hey, good morning.
Good morning, I guess, just first question on credit.
There are two things you can address I guess I need one book for us about the remaining deferred loans.
A portion of the free deferrals into the Sunset for these when do they come to an end and.
Separately, if you could address your outlook for net charge offs as they think about what you talked about potential for sort of reserve release.
What else could be a provision guidance. So as you can address this true.
Sure all the deferrals.
We've talked about before earlier in 'twenty 'twenty most of the deferrals P&I or just the <unk>.
Principal west for three months periods are I would say that the ones that we had that were outstanding at year end some of them, giving just.
The nature and the process of deferrals every three months or a little bit longer term, but on average I would say still three to six months is what those deferral terms are on the charge off ratios and our expectations for 2021.
I wanted to just start by saying if you look at the full year or the fourth quarter.
For 2020, the charge off ratios were very low annual.
Annualized.
For the fourth quarter 20 basis points full year of 17. So at this point in time I think it's realistic that day that it may increase a little bit from these levels.
But as we look at credit quality.
As it stands today, there's nothing that we're really concerned that the charge off ratios will increase dramatically.
Got it and just on a separate note that maybe don't make when you think about the C&I loan growth for the year do you see there's more potential for upside surprise, a downside risk to.
To your outlook and just talk to us about any new opportunities that you see on the CNI lending front that.
That could be a meaningful driver for the bank. Thank you.
Well, we're always working on an upside surprise.
But that being fat alright.
I think that we pretty much look at.
This year now the fourth quarter. This exceptional 18% annualized growth, it's really the accumulation of efforts from the third and the fourth quarter and we kind of like somewhat highlight in the third quarter that we were developing is much stronger pipeline.
So the other's loans getting getting booked in the fourth quarter. So that was exceptional but if we look at the second half of 2020.
Sort of like Oh annualize.
Annualized growth was about 7% for C&I. So we're kind of using that as our current run rate.
And we feel pretty good about where we are today, because we were able to grow in a very diversified.
Direction from industry types product mix and geographic geographic regions, including even the greater China region as I mentioned.
Earlier in my remarks that our.
Our greater China, obviously.
Chinese economy recover.
We cover.
Ahead of the United States and so we saw positive C&I loan growth.
<unk>.
Hong Kong and China.
In the third quarter.
Six 5% annualized growth for C&I loan growth in Greater China, Inc. Third quarter, and then accelerate in the fourth quarter to 12% annualized growth.
So we see that all has so good signs and then if we looked at.
So Paul domestically.
From private equity.
General wholesale manufacturing.
Entertainment clean energy.
Yeah.
All of these different areas.
We're growing.
So from that standpoint, I overall right now we expect them to continue to do well and so hopefully we'll do better than what we are for.
<unk> forecast.
But in terms of downside.
I guess the downside will be you know in case I don't know if they were to say that.
The vaccine distribution, not working well and somehow you know the execution from the government and towards the <unk>.
Stimulus plan was not working and so forth and then that can potentially solve like duval of some of the.
Our customers' confidence too.
Invest all to grow the business.
That can potentially happen, but I looked at the current administration. It looks like we have all very seasoned veterans.
That are managing.
The best day can I have I think.
Higher confidence at this point that there is a higher likelihood.
That they will be able to get the economy turned around in the second half of the year.
Our next question will come from Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks. My first question just in terms of your NII guidance that it's going to generally be in line with loan growth.
Loan growth comments that you said, obviously bad debt loan growth picks up in the back half of the year.
Should we expect the NII to follow that same trend like that it stays relatively flat first half and then accelerate in the back half for an average of let's call. It six to eight per cent or love any commentary. Thanks.
And so our guidance is end of period loan growth of 6% to 8% so with the NII obviously following the average loan growth for the year.
In general probably.
When you look at that my bad on the lower end of that 6% to 8% it probably what makes sense for that calculation.
Got it understood. Okay, Yeah, I was thinking would actually end of period.
That totally makes sense and then just a separate question in terms of your T. So day, one reserve I think it was about 135 basis points. It could be wrong is that still a good target post pandemic of worry you might wanna be given your current loan mix.
Yeah, certainly as you know, it's very complex calculation.
So I can't comment on necessarily where I think it's going to end up but I would confidently say as a comedy economy recovers as our credit quality continues to improve.
That I believe Theres, certainly room to lower that allowance from the levels we are today.
Alright, thank you.
Thanks, Ken.
Yes.
Our next question comes from Michael Young with true Securities. Please go ahead.
Hey, Thanks for taking the question and preemptive congratulations on the year of the ox I hope, it's better than the year of the rat.
Wanted to.
Wanted to ask just did early on on the charge offs this quarter and maybe what you see coming through the pipe you know I know I know.
No generally.
You guys blend in a very low loan to value on on commercial real estate. So just curious what's causing the actual charge offs in this bucket.
Yeah, So the charge offs for C. R V in the quarter.
Obviously, especially with the pandemic and the environment. You know there are some loans that were working through so these have been kind of a problem with nonperforming loans for awhile and depending on kind of looking at where the cash flows are evaluations.
And a year end kind of making sure that the books are in order book.
The charge offs.
Okay, so they're burning through kind of 30% to 50% equity cushions that resolution.
Yeah, well, yeah, I think for these specific.
Loans that are probably not but certainly the circumstances are unique which is why now.
Is what you're referring to rate generally.
For our borrowers and our loan to values being so low there's a lot of equity, but their specific situations related to really cash flow, which is why we took the charge offs.
I do want to add that overall from a commercial real estate portfolio.
Multifamily.
Office building hotels retail shopping centers and then.
Industrial buildings, you name it all of that I mean as of today, we have.
Pretty strong portfolio based on not only adjusted LTV, but many of our customers. Despite the pandemic are still.
Still get them by quite well so in fact, that's why you see the.
Classified and criticized assets ratio coming down and deferrals coming down and <unk>.
Surprisingly.
We always expect that these customers should do well should do better.
As an average compare with <unk>.
Industry as a whole because of the.
Low loan to value and also many of them have personal guarantee and they have a lot of liquidity, but I think the pandemic was a very good.
Stress test to see how overall most of these customers have done well, obviously, we always have a few isolated incident here and there and that's what happened.
Yeah.
Okay, and maybe just as a follow up on the residential lending, which seems like it might be a larger portion of the growth. This year what rate of provision do you put on that and should we expect then kind of a lower growth rate of fee income as a result of that higher mix of Bradley woods.
Yeah Yeah.
For east West and the.
Residential lending portfolio debt, we have in this product some variation of that debt we've been originating for 40 years.
Quality generally has been outstanding in general the reserve that we had for our single family and also the HELOC switch on my AD are largely first lien.
<unk> is quite low relative to the allowance that we book for the rest of the portfolio and in fact with the improvements.
In our forecast.
During the fourth quarter, we reduced the kind of <unk>.
Card reserve for them about 30 basis points down to 20 overall as I mentioned with the data that we have on.
The historic losses over the course of 10 20 years, it's been incredibly low for this portfolio.
Yeah.
Okay. Thank you happy new year.
Happy new year. Thank you.
Our next question comes from Dave Rochester with context point. Please go ahead.
Hey, good morning, guys.
Good morning.
Oh.
My God, but just wondering what your thoughts were on adjusted NIM that you're expecting in that and given the strong securities growth in the quarter. If you go to just hear your assumptions for that growth and deposit growth, which all will ultimately impact earning asset growth in NII as well.
Yeah.
Yeah, Dave I think for cash then it's really maybe the most unknown thing for U S banks right now as far as you know the liquidity and the deposit growth that most banks are.
Continuing to experience I think for us.
When we look at the growth of NIM NII, we're very comfortable that we'll be able to expand from the fourth quarter levels are not year over year about certainly from the fourth quarter levels and that we'll be able to maybe just kind of continue to expand throughout 2018.
One I'll also add you know.
Maybe one of the key drivers of why we're comfortable also on the asset side you know, there's some challenges largely asset sides things have repriced down secure.
Securities now I'll share our like for example, the securities that we're buying in January are probably yielding about one seven per cent or so we had extended out the duration a little bit but not extensively.
And then what we had there where we're more comfortable as we do have a lot of deposits yet and the funding that we expect to reprice.
Over the course of the coming months.
Okay, Great and just one follow up on capital guidance.
Plenty of excess capital to.
The buyback is still outstanding you haven't done anything with it since early last year I was just wondering what you guys are waiting for at this point it looks like you've had some good improvement on the credit side regulators seem to be warming to it a little bit with the DFAST banks are announcing buybacks for this quarter. So just wanted to get your updated thoughts there.
Oh, Yeah, you are right we do.
Currently you have a buyback authorization outstanding of $354 million remains.
At this point, we are not we do not anticipate doing any buyback in the near future because frankly, we look at where we are right now.
I thought about the growth opportunities ahead of us.
And frankly, we prefer to have capital available to take advantage of any emerging opportunities that may come.
And as of today, when we look at where we are from a return perspective.
Currently we are generating attractive.
Return on equity.
And we actually think we can hopefully do even better going forward. So from that point of view is not something that we lack of return that we need buyback to push earning per shares and stuff like that.
Our position is debt.
For my experience for many years at East West Bank.
We always done best.
Whenever there is any kind of economic inflection point.
And so one of the reasons why we haven't done that it's not just ability to execute and all the other no.
All of our.
Associates, who have done a great job, but more importantly.
We have a lot of capital always at that time.
And allow us to be in position.
To take advantage or turn crisis into opportunities and so forth. So I generally inclined to stay with a little bit more capital.
And but we will continue to watch the.
Our <unk>.
<unk> ability to generate.
Above average return of equity.
For our shareholders as small as we feel that we can do that and then we will continue to stay in this position for now until a great opportunity to come along that we may deploy that capital differently.
Our.
Board of directors, all very engaged.
So.
But the beauty of where we are right now if I looked at.
From a.
Capital perspective.
We're really looking at.
The situation that we can.
Ah.
Just.
Mega Zoom call without board members anytime.
And have a discussion execute a buyback so it's not like there was any kind of regulatory constraint or any of the other issues, it's very different than when we're building up.
A separate CNI.
<unk> platform.
Platform when we start building something monumental. So this is something that is very easy to do and we are always shareholders friendly and we know exactly when.
Once the right time to announce a buyback.
Which we did.
Backend.
Early last year.
So I mean, that's the part that we are we philosophically we are in line with our shareholders and we will do the right thing, it's just a matter of for like a.
Level of confidence that we have right now for potential future opportunities and that's why we said at this point.
Our next question comes from Chris Mcgratty with <unk>. Please go ahead.
Great Good morning.
Good morning.
Hey Democrats for the follow up on that prior question.
Is there a is there a shift in maybe.
Willingness to do a deal if youre not going to buy the stock.
Understand.
The confidence in the growth outlook, but I'm wondering if you know a.
Deal might be more on the table in 'twenty one than it was in prior years.
Well I mean, we always interest I mean, you know as you. If you looked at our capital ratio, we always have the capital that allow us to look into various opportunities.
It's just a matter of life when the when the right deal came along we have the capacity.
Some people perspective from Capex perspective.
Two.
No.
Actually to enter into.
A positive transaction.
But but you also have to take a look at where we are if we reflect back from.
The last very tiny acquisition that we made was in 2014 for Metro Bank in Texas.
Small institution for about $2 billion in size.
And at that time.
Since then we've been growing organically.
And we have doubled our size.
In less than six years.
So we've done pretty well organic growth through organic growth. So that our challenge really is more internal internal issues at how do we justify any acquisition, while we have the ability to double our size in less than six years.
And so look like going forward you still have debt.
Our ability to continue to grow organically and so from that perspective, any kind of potential acquisition debt. We looked at it needs to be very attractive. So I mean, that's what we were looking at right now, but when Theyre attractive deal comes along we are absolutely will be interest to look at it so again.
Repeat the same.
Philosophical.
View that I share earlier is that we all shareholders friendly we always do.
It's good for the bank at what's good for the shareholders.
That's great color. Thanks.
Just a follow up on the deposit growth.
The tremendous deposit growth you've seen this year I'm interested in kind of any niche.
Niches that are driving a disproportionate amount of that growth in the noninterest bearing.
The ratios it gave us the high Thirty's percentage of total deposits as a great ratio I'm, just wondering what specific business it might be driving that.
It's coming from all over the place that is that if I look at the C&I industry verticals that we talked about so each and every one of them contributed even.
Even in commercial real estate, we have new commercial real estate customers that they contributed I would say and then of course, our retail banking, we're actually doing quite well. So I would say that not only each and every one of them contributed I think.
That's our share earlier in my remarks as debt.
We brought in.
Quite a few new customers, which generate new deposits.
And then we also got.
The increase in deposits from existing customers.
Because.
Through the years of investments in the.
Core capability.
<unk>.
Product enhancement in our cash management area.
Our payment.
Solar our payment Cape.
Capability is getting better and better.
That in the past we have customers.
While we were having a lending relationship we only get a smaller share of the.
DTA.
We did not have the technical capability to serve a more complex for cash management.
Business that some of our clients have these off somewhat sophisticated module customers.
The last few years through investing.
We continue to improve our cash management and Treasury management capability, and and also FX et cetera. So that's got us to a position that we are getting a larger wallet share.
All of these relationship with existing customers for it.
It's really a combination of both new and existing customers and I do want to emphasize is that we bring a lot of small retail customers one customer at a time at the retail franchise. Despite the pandemic our branches will open August every.
Every single business day, and they are there to attract new customers the PPP.
Oh.
PPP first round was very helpful. In April from April to June we actually brought in quite a few new customers. So it's all of the combination that get us into where we are today.
So I can't think of any particular, one that actually make tactic of a difference because it just across the board.
Thank you.
Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Thanks for sticking back to I guess the margin discussion I was surprised to see the securities book growth. So much and you were able to maintain the yields.
Are you are you changing I guess, the the dynamics of what Youre purchasing there in terms of taking structure or credit risk in the portfolio.
And I.
I guess can you talk a little bit about where you are how you deploy that billion dollars in what you were buying enough.
Oh, yeah, yeah. So in general I would say, we haven't really taken a lot of credit risk. We have extended the duration. The duration has gone up quarter over quarter, well honestly because of the steepening the curve, but also the securities that were purchasing so as a comparison.
About 384 per as of 930, and that's inched up just for 25 and generally if you look at the mix of the securities portfolio not substantially.
Differed from what we've had before as far as what we're buying.
Overall, certainly given the lower for longer environment, we're taking a long hard look at kind of what we're comfortable up from interest rate risk perspective.
And.
The increase certainly and that's also a function really of us the comfort level as far as the deposit the deposit growth, but we anticipate and then Florida, especially with our commercial customers sometimes of balances with us.
N B and go up and down depending on their cash needs, but as we realize that.
The excess liquidity throughout 2020 was going to continue that's why we took the actions are paying off the PPP I laugh and then some of the security and moving more to securities versus keeping in cash.
Okay.
Good color, Thanks, and then Dominic.
I heard you.
Talk about the increase are increased pace of lending.
From greater China, I guess, how how do you think that's going to translate into the pace of cross border trade expectations, and you know, whether that's just pure lending or or the opportunity for fee growth from for them that type of business as well.
In terms of.
Our greater China region, I think debt.
Again, we would expect gradual increase in terms of activities and our cross border team in UX actually have done well both in fact, our debt growth both in loans deposits and fee income.
And so on.
We all.
Looking at in 2021 is also a continuation of a gradual increase.
Just because you know for the last for years on the trauma administration.
That created a lot of hostility between U S and China.
I looked at East West is that we know.
The debt.
We have strong knowledge.
Our debt business environment political environment between U S and China.
And we are very.
With our size, it's much easier to be nimble to navigate accordingly, so despite the fact that.
No debt from the media perspective, the perception.
U S China.
Business are not doing much at all but the fact is we somehow find a way to get the business, but as we go forward and looking at 2021 and beyond under the bite and administration and I just expect that there will be more predictable approach.
And I think the bite administration will bring more stability to the relationship.
So from that standpoint.
We will most likely be able to gain additional business just because debt.
Because of the more predictable and more stable environment that customers for both side will be more comfortable to continue to invest and so forth, they're all going to be sudden area. Some very what I call.
Sensus sensitive industry debt affect national security.
That obviously will no longer be able to.
A lot of business between two shores.
But there are.
Plenty of business, yet or not.
Non cash into security sensitive debt I expect it will continue.
Things such as even tourism.
Sure.
Students attending colleges in U S and some of the other general manufacturing.
General.
Industries.
Even in health care that do not have east what I call very essential purpose in United States, and we expect that there'll be more trade and commerce that took place between the two countries. So we know what they are and we will continue to target those.
Business opportunities, that's why I expect that in the next few years that will be more opportunity to come.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning.
Yeah.
Good morning, My first question was just.
Hi, My first question was just around the multi family portfolio was down slightly this quarter and the growth I think in 2020. It was about a quarter of what it was the prior year.
Can you just speak to your appetite in that asset class and you know whether or not you're you're backing away from certain markets.
What what's your.
But the prospects are for growth there.
We are not backing away for multifamily.
Our approach has always been you know we work with our.
Customers that we know well and.
That have strong credit history.
Whenever these customers' request.
Financing from US, we'll jump into the opportunity.
Now for multifamily terrorists one factor is the.
There are a lot of.
You know like.
You know Fannie Mae type of.
Pricing.
That is hard to beat sometimes we have customers that even they've been banking with us for many years and always look at assets first.
First why refusal, but they're all of these very attractive pricing out there that it just makes sense for them to refi for a very low rate and we.
We respect that and and so from that standpoint, we have I would say that more like a.
<unk>.
Pay off due to refis for a lower rate type of situation to cause our net growth.
No.
Got it.
Okay and then.
Just maybe for Irene the FX and derivative fee income pretty outsize this quarter or is there something there.
That would make that remain.
Elevated here in the near term or should we start to normalize that run rate.
Yeah, I think from a customer income perspective, it was a good quarter for both FX and then IRC IRC and the details of this.
Matthew we have on slide 19 of our deck, you'll see earlier in the year for IRC customer revenue was much higher.
But I'll just point out for the fourth corner.
CVA marks were positive with the kind of uptick in the 10 year and then also kind of run rate on lower kind of credit.
Costs associated with interest rate contracts so for.
For the quarter. If you look at IRC total GAAP revenue was 13 million approximately six.
$6 two of that west customer facing income and then the CVA adjustment was a positive in $6 8 million FX. You know one that we had 90 more kind of transaction in the fourth quarter, particularly kind of quarter over quarter and from the earlier apart and we're optimistic.
We will continue to be able to gorilla FX year over year.
Okay, great. Thank you.
Our next question comes from Brock Vandervliet with UBS. Please go ahead.
Oh, great. Thanks for the question you covered greater China performance already I was just going to ask in terms of is that an area now with the change of administration.
<unk>, Inc.
Mental investment where do you really feel like you've already got the pieces on the board that you need.
Okay.
Well in terms of incremental investment of it depends on the opportunities.
What we we have.
Plenty of capital.
To allow the.
Greater China team to growth if need to be but east west have never really.
Work on our business model to rely on greater China too.
Keep fast pace of growth in order for us to <unk>.
Generally the kind of meaningful for financial performance for our shareholders. So credit China has always been more strategically important than quantity driven so from that perspective.
We will continue to look into how we can use Hong Kong and our China team.
To look in opportunities frankly in the United States many of our domestic C&I business.
<unk> chose east West.
As their banker.
<unk> of our knowledge.
Of the.
China business and often many of them either the importer or exporter. They may be buying components from China, and so forth have that interconnectivity between U S and China.
After all these are the two largest U S and China, the two largest GDP in the world So that interconnectivity.
Are there for many of the business for all U S and our team in China, who are.
Able to hope to provide a V.
<unk> services.
In China or in U S for all claims net of big difference and differentiate east west dramatically from other regional banks that we're competing with so that part has been going well, whether we would need to make additional investment or not I think debt, we will it depends on any.
Kind of.
Potential.
Changes in regulatory direction from U S and China, and what kind of like potential opportunities may come.
If there is a great opportunities again.
A previous question about any kind of opportunity would be interest and look at I would always look at it as that.
We look at it broadly.
And any kind of opportunities that.
Have a high certainty to provide better returns for our shareholders. We will look at it. So at this stage right now I don't really have anything specific to them to mention I would just say that we're always on the lookout to identify opportunities debt to.
To deploy our capital wisely.
Got it and.
More broadly do you anticipate any.
Changes in the in your business model coming out of <unk>.
Covid.
For or not.
Not anything dramatically no I would say that we have always been.
Very much.
Running our organization.
With a very sort of like a diversified.
Approach in terms of net.
Making sure that we touch on many different industries in U S and we have a.
A good percentage of.
Loans, and C&I and well balanced between C&I CRE and single family mortgages.
From the consumer side.
And we are generating a stronger fee income every year from wealth management to foreign exchange and then.
Cash management fee income and interest rate swap et cetera, et cetera. So that is still going to be in place and we are always going to make sure. We have a good balance between commercial banking and retail banking.
There are not many banks out there, they're competing with US right now with our size that actually have the strong retail banking business like we do.
So that's a big advantage for us and we will continue to grow out.
<unk> retail banking business going forward and the other element of greater China is that as.
As I said earlier with.
That's too big GDP.
Our largest and our second largest and there are plenty of business for us to identify particularly for an organization like east West that don't really have much competition against us because most of the U S things really do not have this.
Part of the growth element, so we looked at all of that.
Why.
For years, we set our mission ambition in terms of in our business model.
Two focusing on induced direction.
And I would say that this is <unk>.
For a less the same direction that we'll be focusing on in the next 10 years or so.
At this point, we're very comfortable with our business strategy going forward.
Great. Thanks for the color.
Our next question comes from David <unk> Wedbush Securities. Please go ahead.
Hi, Thanks.
Wanted to follow up on <unk>.
Loan growth C&I growth you mentioned turned positive in September and momentum continued into into year and you also mentioned that.
Pipelines.
<unk> positive momentum as you kind of look out from here, but you also mentioned to expect slower growth in C&I in the first half of 'twenty, one versus the second half of 'twenty. One so should we expect kind of similar C&I growth in the first half of 'twenty, one versus the annualized growth in the fourth quarter of course on that.
Ex PPP basis, and then a further pick up.
In the second half from there.
No as I had mentioned I think that maybe in one of the Q&A earlier.
Our.
Keep in mind, our fourth quarter.
Annualized growth rate was 18%.
But if you look at.
For second half of the year.
Annualized growth rate.
Was 7% for C&I by 7%, so we're using the 7% run rate as what we expected for the year.
And at this stage.
We figure out in the current environment, just looking at the current environment with.
We're still trying to figure out do we have enough vaccine for everybody or how many more variance of the value of the Corona virus that may have popped up.
Just looked at it is that maybe the first half.
Quarter end too.
Wouldn't be expecting business to be coming back as business as usual as strong but.
But I would expect that after this by the summer or after the summer.
<unk> business is going to come back stronger because most of the economies can get back into normal. So there will be a pickup then so keep in mind that.
While we are booking commitment.
If you look at the utilization rate.
We are somewhat of an all time low because normally in the past, we will always have about 80% utilization rate dropped down to 70%.
Is that business or not drawing many of them are not drawing down their lines. So we are very pleased that we can book new business.
Bringing new customers, but many of them is to hunker down and not drawing their lines and until the economy really see.
Some sort of like normalcy I would expect that business will continue to be a hazelton too.
Actively draw down the line and actively engaged in a full flow business.
So from that standpoint, that's why we think that chances are it's going to be a little bit slower in the for.
First two quarters, and then pick it up a little bit stronger in the third and fourth quarter. One other factor is that there is always seasonality for some of our C&I business.
That in general.
<unk>.
Things tend to slow down particular expenses slowdown in the first and second quarter, because particularly the business.
Ah you know cater to consumer retail and.
Ah.
There is always like.
Stacking up the inventory.
Right around it near the end of summer and then start stacking it up all the way through.
Near Christmas.
No.
And that type of.
Core business that we have for years.
It's still.
A meaningful size of business in our C&I portfolio, and we expect that business those business will continue to behave accordingly, which is a little bit slower in the first and second quarter a little bit.
Stronger in the third and fourth quarter because of debt.
Utilization behavior.
So from that standpoint, I think it's a combination of different factors debt.
Cause us to conclude with this.
Sort of like forecast.
Thanks for that very helpful. And then shifting to a question on credit the oil and gas portfolio classified loans were $240 million down 13%.
So clearly stresses easing in this portfolio would it be fair to.
To say that the base case is for continued improvement in.
In the oil and gas portfolio and there's potential for reserve releases here.
No I would say that's not outside of the realm of possibility.
At this point in time, you can just see from the information that we share.
We did kind of in charge the reserve ratio.
At year end compared to 930.
Honestly, given kind of the environment, we wanted to maintain kind of a conservative deal about that but I would I would say that if things continue to improve.
The reserve release is within the realm of possibility.
Thanks very much.
This concludes our question and answer session I would like to turn the conference back over to Dominic Inc. For any closing remarks.
Thank you and thank you all for joining our call today and you know we are very much looking forward to talking to you in our next call in April.
Bye bye.
Yeah.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.