East West Bancorp Dinged for Dull Outlook

This morning Pasadena, CA based regional bank East West Bancorp (EWBC) reported second quarter earnings that saw the company swing to a profit.  Net income was about $36.3 million or 21 cents per share, three cents better than expected and far more impressive than a loss of $92.1 million a year-ago.  Considered by many a bank with real growth potential, the bank has been active in acquisitions over the last year as they have participated in a couple of deals with distressed banks using FDIC-assistance.

In general, credit trends improved for the bank, and they have slashed their provision for loan losses by 64% to $55.3 million since a year ago.  Furthermore, they expect continued reductions in this safety net in the third quarter.  However, despite topping earnings forecasts the bank declined more than 11% due to a weaker outlook than the market had hoped to see.

With EWBC’s acquisitions and improving credit trends (net interest margin improved and delinquencies fell), it was clearly a disappointment that the company was conservative towards growth going forward.  Many investors had looked at this stock as one of the most attractive growth stories in financial services, but today’s report may make that thesis a little less secure, as management expects the balance sheet to stay about flat in the quarter.    The FDIC has given East West Bancorp some breathing room to deal with the assets of the failed banks, but we wonder if management is having a harder time integrating United Commercial Bank and Washington First International than it originally planned.

At Ockham, we have had an Overvalued rating on EWBC since just after the United Commercial Bank takeover and the stock’s resultant spike.  Thus far the market has liked the move as it has continued higher by about 17% during that time, but according to our methodology the stock is too expensive given the current fundamentals.  For example, over the past ten years EWBC has traded for between 12.2x and 27.6x times cash earnings per share, but that multiple currently stands at 30.4x well above the historically normal range.  With the latest quarter in the books and showing some serious improvements, we would have expected East West to be more aggressive towards the third quarter.  At this point it seems to us that the market has awarded EWBC a growth premium that their management is not ready to pursue just yet.  With that said after the stock’s sell-off today we may consider an upgrade to Fairly Valued, as it has fallen down into our expected price range of $12 to $16.

Read the original story at Ockham Research