December 15, 2017 / 9:17 PM / 6 months ago

Fitch Affirms East Bancorp at 'BBB' Following Mid-tier Regional Bank Peer Review; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 15 (Fitch) Fitch Ratings has affirmed East West Bancorp, Inc.'s (EWBC) ratings at 'BBB'/'F2', reflecting the bank's strong earnings profile, good asset quality, and distinctive franchise. The Rating Outlook is Stable. A full list of rating actions follows at the end of this rating action commentary. The rating action follows a periodic review of the mid-tier regional banking group, which includes: BankUnited, Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp, Inc. (EWBC), First Horizon National Corporation (FHN), First National of Nebraska, Inc. (FNNI), Fulton Financial Corporation (FULT), Hilltop Holdings Inc. (HTH), Synovus Financial Corp. (SNV), Trustmark Corporation (TMRK), UMB Financial Corp. (UMBF), Umpqua Holdings Corporation (UMPQ) and Wintrust Financial Corporation (WTFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the mid-tier regional bank sector in general, refer to the special report titled "Mid-tier Regional Bank Periodic Review," to be published shortly on www.fitchratings.com. KEY RATING DRIVERS IDRs, VRs, AND SENIOR DEBT EWBC's ratings are supported by its strong earnings profile, good asset quality, and distinctive franchise. This is primarily offset by strong loan growth trends that Fitch views cautiously, particularly in the context of a still low interest rate environment to date. EWBC's earning profile is the primary ratings driver. Over the past 10 quarters, EWBC has reported among the highest ROAs on average of all Fitch-rated U.S. banks and the highest amongst its peers. The company's recent earnings continue to benefit from very low overhead expenses, good spread income, and nominal credit costs during the first nine months of 2017. Results for the year also benefitted from a large gain in 1Q17 on the sale and leaseback of a commercial property in San Francisco, which EWBC acquired as part of its 2009 acquisition of United Commercial Bank. EWBC has demonstrated success in growing fee income considerably recently; however, EWBC's earnings remain heavily reliant on spread income, making the company more exposed to the interest rate environment than its peers. That said, based on company-reported interest rate risk simulation results, EWBC appears the best positioned for a rising rate interest rate scenario with projected net interest income to increase the most of the mid-tier peer group. While interest rate risk simulation results are highly dependent on modeling assumptions, especially deposit betas, which may behave very differently than in the past, the make-up of EWBC's loan book suggests the company stands to benefit as rates increase. EWBC's asset quality also remains good with just 3bps in annualized net charge-offs during the first nine months of 2017. Further, EWBC's level of problem assets is well below peer averages. Fitch also views EWBC's distinctive franchise favorably in its ability to attract Chinese-American borrowers, as well as depositors, albeit at interest-bearing deposit costs slightly higher than the mid-tier median. EWBC is unique in that it is the only bank of its size to have a notable presence in China, and the only Asian-American focused bank with full service banking offices in the U.S. and China. Partially offsetting these ratings drivers, Fitch observes continued strong loan growth across numerous categories, including C&I, CRE, residential real estate and multifamily lending. The company's loan growth over the past 12 months is higher than all of its mid-tier peers, and raises concerns as to whether EWBC is receiving the appropriate risk-adjusted return on these newer originations. While Fitch views outsized loan growth cautiously in general, the agency notes that at Sept. 30, 2017, 64% of total non-accruing balances were to C&I borrowers, which only comprise around a third of total outstandings. Although C&I loan losses have remained modest to date, Fitch will continue to analyze the asset quality of these, and the entire loan portfolio, for any deterioration, particularly as rates rise. EWBC's capital is considered adequate, with an estimated CET1 under Basel III at 11.3% at Sept. 30, 2017, just slightly below the peer median. The bank has grown its capital ratios over the past year, and demonstrates superior capital generation capabilities relative to peers. Fitch views this as prudent, in light of the strong loan growth over the past several years. Fitch views EWBC's liquidity profile as solid with virtually all of its funding coming from deposits, and a growing reliance on non-interest bearing deposits. However, the loan-to-deposit ratio keeps rising, as loan growth has outpaced deposit growth. While the LTD has increased, it remains manageable at 91% and below the peer median. Fitch views any slowdown in China as manageable for EWBC. As of Sept. 30, 2017, EWBC reported $1.6 billion to the wholesale trade sector, largely related to companies that import goods from China. EWBC also reported $686 million of loans held in the Hong Kong branch and $500 million in the subsidiary bank in China. Fitch anticipates that not all of these loans would be impacted given a slowdown, and that there would likely be appropriate collateral protection in the event of a slowdown or other geopolitical disruption. HYBRID SECURITIES Hybrid capital issued by EWBC and its subsidiaries are all notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. Legacy Tier 1 securities are generally rated four notches below the VR, made up of two notches for high loss severity relative to average recoveries, and two further notches for non-performance risk, reflecting the fact that coupon omission is not fully discretionary. LONG- AND SHORT-TERM DEPOSIT RATINGS Deposit ratings are one notch higher than the IDR reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. HOLDING COMPANY EWBC's IDR and VR are equalized with those of East West Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR EWBC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, EWBC is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRs, VRs, AND SENIOR DEBT Positive rating momentum is limited in the near term given the bank's recent growth. If asset quality begins to show signs of deterioration, particularly in newly originated commercial loans, negative credit action might occur, especially if capital is managed materially lower. Loan losses in excess of historical loan losses in C&I, CRE, multifamily or residential mortgages could precipitate a negative rating action, particularly if the CET1 is also managed down to less than 9%. Failure to fully address the November 2015 BSA-related regulatory agreement in a timely manner could also lead to downward ratings momentum. Fitch expects EWBC to have this agreement resolved within the next 12 to 18 months. Conversely, superior credit performance relative to peers and industry trends during the next asset quality downturn could provide support for ratings momentum, if accomplished while maintaining it strong earnings profile. HYBRID SECURITIES The ratings for trust preferred securities are sensitive to any change to EWBC's VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long-and short-term deposit ratings are sensitive to any change to EWBC's long-and short-term IDR. HOLDING COMPANY Should EWBC's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since EWBC's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings: East West Bancorp, Inc. --Long-term IDR at 'BBB'; Outlook Stable; --Short-term IDR at 'F2'; --Viability Rating at 'bbb'; --Support at '5'; --Support Floor at 'NF'. East West Bank --Long-term IDR at 'BBB'; Outlook Stable; --Long-term deposits at 'BBB+'; --Short-term IDR at 'F2'; --Short-term deposits at 'F2'; --Viability Rating at 'bbb'; --Support at '5'; --Support Floor at 'NF'. East West Capital Trust V, VI, VII, VIII & IX --Trust preferred securities at 'BB-'. Contact: Primary Analyst Johann Moller Associate Director +1-646-582-4954 Fitch Ratings, Inc. 33 Whitehall Street New York, New York 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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