East West Bancorp Inc (EWBC) 2018 Q4 法說會逐字稿

Good day, and welcome to the East West Bancorp's Fourth Quarter and Full Year 2018 Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development.

Please go ahead.

Thank you, Allison.

Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the fourth quarter of 2018.

With me on this conference call today are Dominic Ng, 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 Securities Litigation Reform Act of 1995.

These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties.

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, 2017.

In addition, some of the numbers referenced on this call pertain to adjusted numbers.

Please refer to our fourth quarter earnings release for 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 in replay format on our Investor Relations website.

I will now turn the call over to Dominic.

Thank you, Julianna.

Good morning.

Thank you, everyone, for joining us for our fourth quarter 2018 earnings call.

I will begin our discussion with a summary of results on Slide 3.

This morning, we reported full year 2018 net income of $704 million or $4.81 per share, marking the ninth consecutive year that East West has achieved record earnings.

Full year net income and diluted earnings per share both grew by 39% from 2017.

Our record earnings in 2018 were driven by robust year-over-year loan growth, strong net interest income growth, expanding net interest margin, controlled expense growth and stable asset quality.

This was achievable because of the diligent efforts of our 3,150 associates.

And I would like to thank every one of them for contributing to the success of the company.

For the fourth quarter of 2018, we reported net earnings of $173 million or $1.18 per share, up 104% year-over-year from $85 million or $0.58 per share and up from last quarter's earnings of $171 million or $1.17 per share.

Quarter-over-quarter, our net interest income grew by 6%, reaching a record $369 million in the fourth quarter, and our net interest margin expanded to 3.79% for the fourth quarter.

Our nonperforming assets decreased to $93 million or just 0.23% of total assets as of December 31, 2018, and quarterly net charge-offs were 20 basis point of average loans, similar to the year-ago quarter.

Now turning to Slide 4. You can see that our fourth quarter return on assets was 1.69%, return on equity was 15.8% and return on tangible equity was 18%.

Our profitability ratios are consistently attractive.

Our 5-quarter range for operating ROA has been 1.35% to 1.84%.

Our ROE has been 13% to 17%.

And tangible ROE has been 15.1% to 19.7%.

Looking towards 2019 and beyond, I am excited about the opportunity for East West to win new business and deepen our existing client relationships.

With our presence in the United States and Greater China, we have built cross-border banking expertise that differentiates us from other banks.

Despite the decline in Chinese exports and Chinese direct investment to the United States, at East West, we are actively assisting our current and prospective clients and finding opportunities for growth.

Our bankers help our clients navigate the evolving geopolitical environment by providing them with expert up-to-date knowledge and understanding essential to conducting business in both markets and matching East West products and services to meet each client's unique cross-border needs.

Although some of our wholesale trade clients have scaled back their activities, on the other hand, others are taking advantage of the disruption to gain market share.

Overall, our wholesale trade portfolio is up 7% year-over-year.

The path to cross-border success for East West are multifaceted, and we are comfortable that our differentiating position will serve us well in supporting the continued profitable growth of our well-diversified business.

Our outlook for 2019 is positive, and we continue to invest in our business.

In 2018, we invested in enhancing our cross-border team and capabilities and in upgrading our cash management platform.

And in 2019, we will continue to make investments in technology to improve our fee-based income capabilities, particularly in foreign exchange and cross-border payments.

And as we have mentioned previously, another ongoing initiative is building a digital consumer banking platform tailored to the needs of our consumer client base.

Now moving on to a discussion on this quarter's loan and deposit growth on Slide #5 and Slide #6.

As of December 31, 2018, total loans reached a record $32.4 billion, growing by $1.2 billion or 15% linked quarter annualized from September 30, 2018, and growing by 11% year-over-year.

In the fourth quarter, average loans of $31.5 billion grew by 13% linked quarter annualized.

Loan growth in the fourth quarter was broad based across our lending portfolio.

Our strongest quarter-over-quarter growth in average balances was in commercial and industrial loans, which were up by $427 million or 15% annualized followed by single-family mortgage, which were up by $359 million or 26% annualized.

Our CRE loans increased by $295 million or 10% annualized.

Within our commercial lending, this quarter, we saw strong performance in our private equity and entertainment portfolios.

On Slide 6, you can see that total deposits grew to a record $35.4 billion as of December 31, 2018, an increase of $1.8 billion or 21% annualized from September 30, 2018, and up by $3.2 billion or 10% year-over-year.

Our fourth quarter average deposit of $35 billion also grew by 21% linked quarter annualized.

By category, on an average basis, quarter-over-quarter growth was led by DDA, up by $808 million or 30% annualized, followed by money market accounts up by $567 million or 30% annualized and certificate of deposit, up by $506 million or 24% annualized.

We tend to experience seasonally strong demand deposit growth in the fourth quarter and anticipate slow growth rate in the first half of the year.

And now I will turn the call over to Irene for a more detailed discussion of our income statement and outlook.

Thank you, Dominic.

On Page 7, we have a slide that shows the summary income statement, a snapshot of the key items, including tax-related items.

I'll skip the summary and dive right into the details on Slide 8.

Fourth quarter net interest income of $367 million (sic) [$369 million] increased by 6% linked quarter driven by a combination of expanding loan yields, average loan growth and an increase in interest-bearing cash and cash equivalents, partially offset by the increased deposit expense.

It was a record quarter of net interest income for East West.

Year-over-year, our net interest income grew by 16%.

GAAP net interest margin of 3.79% increased by 3 basis points quarter-over-quarter and 22 basis points year-over-year.

And excluding the impact of accretion, adjusted net interest margin of 3.73% was up by 1 basis point from the previous quarter and up by 24 basis points year-over-year.

We had an adjustment to amortization of certain IO strips, which decreased interest income by $1.4 million in the quarter and decreased NIM by 1 basis point.

Without this item, our fourth quarter GAAP NIM would have been 3.80% and the adjusted NIM would have been 3.74%.

Excluding that item, the drivers of a 3 basis point expansion to the GAAP margin for the fourth quarter are as follows: a 15 basis point increase stemming from higher loan yields, which reflected upward repricing of existing loans as well as higher yield on new loans across our portfolios; a 2 basis point increase due to ASC 310-30 discount accretion income; a 1 basis point increase from higher yields on other earning assets, partially offset by a 12 basis point decrease from higher rates paid on deposits.

In addition, balance sheet mix change decreased the NIM by 3 basis points.

Loan growth was more back-end loaded in the fourth quarter, whereas deposit growth was evenly distributed throughout the quarter, which accounted for the elevated average quarterly balances in the lower-yielding interest-bearing cash and cash equivalents.

I would like to point out that the additional liquidity is also the main driver of variance to NIM relative to our expectation as of the end of last quarter.

We had initially anticipated a fourth quarter decline in cash and cash equivalents and, thus, more NIM expansion but strong deposit growth, including seasonal growth of demand deposits, came in above our expectations.

For 2019, we expect a modestly expanding net interest margin for the full year even with the current expectation for no increases to the prime rate.

As of December 31, the end of period cost of our total deposits was 95 basis points compared to 83 basis points as of September 30, and end of period cost of our interest-bearing deposits was 1.4% compared to 1.22% as of September 30.

Cycle to-date, since the Federal Reserve started increasing Fed funds rate in December 2015, we have had an implied beta of 56% on our loan yield, excluding ASC 310-30 accretion, and 30% on our total deposit cost, again, relative to the change in the average Fed funds rate.

Our implied loan beta in the fourth quarter of 2018 was 61%, up from 55% in the third quarter, and our implied total deposit cost beta was 45% in the fourth quarter, down from 66% in the third quarter.

Now turning to Slide 9. Total noninterest income in the fourth quarter was $42 million compared to $46.5 million in the prior quarter.

Excluding the impact from all gains on sales, total fourth quarter noninterest income was $39 million compared to $42 million in the prior quarter.

Customer-driven income in the fourth quarter was $37 million, essentially flat from the prior quarter.

Quarter-over-quarter, letter of credit fees and FX income increased, reflecting a greater volume of customer-driven FX transactions, partially offset by mark-to-market revaluations for foreign currency balance sheet items.

Quarter-over-quarter, derivative fees decreased due to a decrease in the fair value of interest rate swaps as well as a lower volume of customer transactions.

Moving on to Slide 10.

Fourth quarter noninterest expense was $188 million, and our adjusted noninterest expense, excluding amortization of tax credit investments and core deposit intangibles, was $156 million, a slight decrease from $158 million in the third quarter.

Our fourth quarter adjusted efficiency ratio improved to 37.9% compared to 39.9% in the third quarter as our revenue growth outpaced expense growth, generating positive operating leverage.

Over the past 5 quarters, our adjusted efficiency ratio has ranged from 41.6% down to 37.9% in the fourth quarter.

Our fourth quarter 2018 pretax, preprovision income of $255 million grew by 7% quarter-over-quarter, and our fourth quarter pretax, preprovision profitability ratio of 2.5% was up by 6 basis points from third quarter.

Year-over-year, our pretax, preprovision income is up by 20% and pretax, preprovision profitability has expanded by 23 basis points.

In Slide 11 of the presentation, we detail out critical asset quality metrics.

Our allowance for loan losses totaled $311 million as of December 31, 2018, or 96 basis points of loans held for investment, down slightly from 99 basis points as of both September 30, 2018, and December 31, 2017.

Nonperforming assets of $93 million as of December 31 decreased by $22 million or 19% from $115 million as of September 30 and were equivalent to 23 basis points of total assets as of December 31, 2018, compared to 29 basis points as of the end of third quarter and 31 basis points at the end of the previous year.

For the full year of 2018, our net charge-offs were $40 million or 13 basis points of average loans, and we recorded a provision of credit losses of $64 million.

This compares to net charge-offs of $23 million or 8 basis points of average loans and a provision for credit losses of $46 million in the full year of 2017.

We continue to provision in excess of charge-offs to support our strong pace of loan origination.

For the fourth quarter of 2018, net charge-offs were $16 million or 20 basis points of average loans annualized and the provision for credit losses recorded was $18 million.

Moving to capital ratios on Slide 12.

East West capital ratios remain strong.

Tangible equity per share of $27.15 as of December 31 grew 5% linked quarter and grew by 17% year-over-year.

Our regulatory capital ratios increased by 67 to 77 basis points year-over-year.

We believe that organic balance sheet growth followed by measured common dividend increases is the best use of our capital at this time given our strong outlook for the near to medium term.

As noted by Dominic and announced in our earnings release earlier today, East West Board of Directors has declared first quarter 2019 dividends for the common stock.

The common stock cash dividend of 23 basis points (sic) [$0.23] per share is payable on February 15, 2019, to stockholders of record on February 4, 2019.

And with that, I'll move on to reviewing our 2019 outlook on Slide 13.

For the full year 2019 compared to our full year 2018 results, we expect end-of-period loans to increase by approximately 10%, diversified across the key categories of C&I, commercial real estate and single family.

We anticipate deposit growth will support the loan growth in 2019.

We expect our 2019 net interest income, excluding ASC 310-30 discount accretion, to grow at a low double-digit percentage rate.

Please note, this is a new item we have added to our published outlook.

We expect our adjusted net interest margin, excluding the impact of ASC 310-30 discount accretion, to range between 3.75% and 3.80%.

Our outlook incorporates no additional Fed funds rate increases in 2019.

And with that, we still expect an expanding NIM in 2019 relative to full year 2018 and the fourth quarter margin as well.

The impact of ASC 310-30 is continuing to trend down, and we expect accretion income to add just 2 basis points to the reported GAAP net interest margin in 2019.

We expect noninterest expense, excluding tax credit amortization and core deposit premium amortization, to increase at a mid-single-digit rate.

Given our current view of revenue growth, this does imply modest, positive operating leverage in our full year efficiency ratio for 2019 compared to 40% in 2018.

We project that the provision for credit losses will range between $80 million and $90 million.

The expected year-over-year increase in the provision expense reflects loan growth as we otherwise expect that the asset quality backdrop in 2019 to be broadly similar to what we have experienced in 2018.

Finally, we anticipate that the effective tax rate will be 15% for 2019 as we expect to continue to invest in tax credit investments which reduce our cash liability from the statutory rates.

We anticipate tax credit investments to be at similar levels to 2018.

With that, I will now turn the call back to Dominic for closing remarks.

Thank you, Irene.

In closing, we had a solid fourth quarter to finish 2018.

We are looking forward to another year of strong financial performance in 2019.

And with that, I will now open the call to questions.

Operator?

(Operator Instructions) Our first question today will come from Jared Shaw of Wells Fargo.

Maybe if we can start with the loan guidance outlook.

The 10% number is less than what we saw this year.

I guess what would have to happen to see loan growth come in at a higher level?

Would it be an actual increase in the economic activity?

Or are you expecting some type of a -- maybe a broader economic slowdown when you look at that 10% number?

Well, we did 11% last year.

So this, we're projecting 10%.

In terms of volume of business, probably worked out about more or less the same.

So we are really not particularly looking at any sort of slowdown or anything like that at all.

I think what we see is that we have a very diversified loan portfolio.

And we see growth from single-family mortgages.

We see growth from commercial real estate.

We also see growth in C&I.

And particularly in C&I -- within C&I, we have a very diversified portfolio.

So growth come from different places and in different quarters.

Like a good example will be in the fourth quarter our private equity capital call line and the entertainment portfolio risen up.

And then if you recall in the third quarter, our energy business -- oil and gas business had gone up.

So we just, from different areas and different quarters, they stepped up.

I think that in a way that all of them are actually making pretty positive organic growth consistently.

I mean, sometimes the different performance per quarter has to do with payoff because various industries or various borrowers have different needs, and so forth, and then that payoff cause some of these to vary.

But all in all, I'd say that, at this point right now, we are comfortable with our guidance.

Is it likely that we can do more?

We're always trying to do more.

And then so my view is that, at this stage, we feel pretty good with 10%, and we're going to try to do our best to outdo that guidance, if possible.

And if the economic situation get better, we obviously will update our guidance later on down the road.

Okay.

And then shifting to capital, you do have a strong capital position with the outlook for 2019.

That should stay strong.

Would you consider supplementing capital management with a buyback or a special dividend beyond the traditional dividend here?

And I guess the back end of that question is, where do you think a good capital ratio is for the bank now in terms of an optimal capital ratio?

Yes.

As Dominic mentioned, we are projecting that we will continue to have a strong organic growth.

And that is, in our view, the best use of our capital and best for shareholders.

Certainly, if the capital ratios continue to grow, the environment, it's more -- if we look at the environment and think that there are other alternatives for the capital for shareholders, that's something that we'll consider, and then we have active dialogue with the board about, Jared.

Yes.

We constantly have discussion with our board.

And so we are very shareholders friendly.

So that's why this topic is always in discussion.

And so far, we look at with our very strong return on equity, and we continue to be able to find new clients, grow our business organically.

We are one of the few banks in the industry that really sort of not as suitable to go into this sort of buyback formula.

So at this stage, that's where we are right now.

And then, but if that condition ever change at East West, obviously, we are very logical and we will do what's right for our shareholders.

And our next question today will come from Dave Rochester of Deutsche Bank.

A couple on the NIM guide.

What are you guys expecting for the impact from the December hike in this guidance and the liquidity build impact that you had this quarter, if you're expecting that to run off or sort of remain here?

Yes, Dave.

So we are expecting a increase in our interest income and in the NIM.

And our guidance for the full year 2019 does reflect that as far as the increase the Fed funds in December.

Overall, we do not think that we'll have the same level of excess liquidity that we did for most of the fourth quarter next year as well.

So I would say, if you look at the full year '18 as more of a normalized rate for us as far as the liquidity and the amount of excess shorter-duration assets that we have versus exactly what happened in the fourth quarter, that may help you kind of model that out.

Okay.

And then just a follow-up.

As you guys think about ways to support the NIM over the next year, it looks like your securities yield is actually below your cash yield right now, and it sits at a negative spread versus some of your borrowings and maybe even some of your higher-rate CDs.

Have you guys thought about running some of that off and repaying borrowings completely and then maybe repositioning the rest?

It seems like you have the capital to do that if you had to take some hits on that repositioning, just wanted to get some thoughts there.

From time to time, we've looked at that.

And over the, I think, the last several years, we had done some repositioning.

I will just kind of point out the fourth quarter security yields was negatively impacted by the additional amortization.

So ex that, we would have been at a 2.35%.

If we look at what we're buying right now, the yields are higher, closer probably to 2.6%.

A little bit misleading with some of the cash.

Some of that cash is in our Hong Kong subsidiary bank where the rates are higher, so that skews it a little bit as well.

Maybe off-line can give a little bit more of the detail on that for you.

But certainly, we do anticipate being able to redeploy those securities in higher-yielding assets.

But overall, we're not taking too much duration risk on that portfolio, and we are reinvesting in similar types of securities, agencies, Ginnies.

Our next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch.

So I think just wanted to follow up on the NIM on the other side of the balance sheet where we've seen a fair amount of growth in time deposits and you grew noninterest-bearing deposits as well.

So I'm just trying to understand as you think about the NIM, my sense is, without any rate hikes, we see another leg higher in first quarter and then drifts lower as new growth is put on.

Is that the right way to think about how the trajectory of NIM in the absence of rate hikes?

And if you can talk about just outlook on deposit growth from a mix standpoint, do you expect continued sort of mix shift towards time deposits to continue?

I think for the time deposit, well, obviously, because of the rate hike, we've seen the customers now finally -- many of our core retail customers now start finally paying attention to deposit interest rate does matter.

So they are now, many of them have converted.

But still, what you notice is that, as you've seen in our fourth quarter numbers, we are not just growing CDs.

In fact, we grew even more on money market accounts.

And so we continue to have this discussion and dialogue with our customers.

And sometimes, you lock in a CD, it may not give them the flexibility.

But more importantly, we are getting more and more commercial customers.

So because of the nature of the commercial customers, I mean, they do need flexibility, so many of them are really not going to be in tune and go into CDs.

So if you look in 2019, I don't think that the conversion rate will be as high as what happened in 2018.

I just think that many of them who are our core customers who converted from the regular checking accounts or maybe money market accounts to CDs pretty much have done it.

And we will bring in some new CD customers without a doubt in 2019 because every year we bring in new customers.

But then, I would say that the rate of conversion should be substantially less than 2018.

Got it.

And just on a separate topic, Dominic.

So you were very upbeat on loan growth last quarter, and I think that's supported in your guidance for 10% this year.

Having said that, I think from an investor standpoint, there remains concerns around China tariffs, and let's assume the worst case where there's no deal, we get into another round of tariffs, like where is the downside risk to growth?

Is it in the mortgage growth slowing down?

Is it commercial growth slowing down?

Like how do -- all on the credit front.

I know you've talked about this but would love to get your updated thoughts here because I feel like it's weighed on the stock all year.

Yes.

What you can see in 2018, if you look at what should be listed on the top-10 news in any kind of media or magazine, the trade war will probably front and center at the top.

And interesting enough, while we presented the East West exposure to tariffs 2 quarters in a row, but at the end of the day, come the end of the year, we actually grew our trade portfolio by 7% year-over-year.

I think organization like East West always has a mindset that we are still, at our size, can be very nimble.

And one key advantage we have is that we know the space, we know the business and we know how to navigate.

And that's why, while others may be shying away from the exposure, sometimes we're able to capitalize on these kind of like perceived crisis situation to result in tangible opportunities for East West Bank.

So I don't know what the final discussions is going to be like between U.S. and China.

At this stage, it looks much more positive than last year.

But you never know until it's all done.

And when I say done, it's never going to be all done.

Most likely, there's going to be some sort of like general agreement, but then later on, there may be some of the other issues that may pop up.

Our position at East West is that we're watching the development on a day-to-day basis and making sure that, as long as we stay knowledgeable, we'll always find opportunities to capitalize on it.

The other thing I want to mention, as you highlight that, is that single family or is it CRE or is it C&I that may slow down due to the U.S. trade tariff dispute.

Again, it's hard to tell.

We thought that, with the restriction of money coming from China 2 years ago, there will be a much slower growth in our single-family mortgages area as we do have some of these clients from China and they actually bought home in United States.

It was substantial down payment and get a small mortgage from us.

But as of 2018, we continue to have strong growth in our single-family mortgage.

And we also so far have a pretty strong pipeline.

And what we've seen is that -- and our conclusion is that besides just the new investors coming from China that are buying single-family homes here in the past, we are taking market share domestically from either Chinese-American citizens here or other non-Asian customers who find our services, the turnaround time to be substantially better than the other peers.

And for that reason that we're taking share.

So we will continue to also work on that to make sure 2019 that we execute doing our job so that we will be able to get more business than the year before.

And that's pretty much our East West strategy is that we execute and we focus.

And that's about it to pretty much get the financial results of what we just presented to you earlier.

And in 2019 is more or less the same.

We got to execute.

And we need to focus.

And that's pretty much about it.

Our next question will come from Chris McGratty of KBW.

Irene, the mid-single-digit expense guide obviously doesn't include rates.

To the extent we do get rate hikes in the year, number one, can you talk to the sensitivity of that perhaps going higher?

And also the sensitivity for each hike, can you just remind us what the basis point dollar effect is or the net interest income is?

Chris, I think you were referring to our guidance where we say that we have mid-single-digit growth in operating expense.

I don't know if the rate hike will really impact that significantly.

Certainly, depending on the rate environment, production may be lower or higher, and that will affect the compensation number.

But overall, nothing substantial.

Okay.

And then the sensitivity, can you just remind us the basis point sensitivity to each 25?

Are you referring to NIM?

That's right.

Yes.

Chris, this is Julianna.

In the fourth quarter, the sensitivity of the net interest margin to each rate hike that we saw was -- on average, we are now at 7 basis point per 25 through the fourth quarter.

Our next question will come from Michael Young of SunTrust.

Wanted to get a little bit of color on just the fee income growth outlook.

I know, historically, that's been tracking kind of closer to loan growth potentially in most categories, but we've been relatively flat the last couple years.

So just wanted to see any updated thoughts if that's mix shift in the type of loan growth or any change in customer demand, et cetera.

I think relatively flat year-over-year is exactly where we're at as we compare to last year.

If we look at the category, certainly, there are areas where we've seen growth, as you mentioned, related to the loan growth.

Year-over-year, you had certain categories, for example, FX fee income.

Last year, we had a lot more volume of revenue related to customer transactions related to where the view was of what would happen with the Chinese RMB currency.

This year, less so.

So some of that market driven, same thing with the swaps given kind of where rates are and the flatness of the curve and the expectations for the future.

I think when we look at 2019, certainly, in those areas from a commercial side, also from a consumer side, wealth management, we feel there's a little bit of work to do and that we're optimistic we will be able to kind of have that growth in 2019 in all these categories.

Yes.

I think that as I just said it earlier, execution and focus.

We need better execution and focus in 2019.

But I tell you, I feel pretty confident that can be better.

I feel pretty good about talking to these team members in these categories, and they all feel that 2019 -- relatively optimistic that we will be able to do better.

Okay.

And just taking all that together, maybe if we get a low single-digit kind of growth in fees or something that, high single-digit or double-digit net interest income growth and then the mid-single-digit expense growth, I mean, we should see pretty meaningful improvement in the efficiency ratio this year.

Is that the outlook?

And anything that would cause that to kind of not come to fruition?

I think I would categorize that as improvement.

I don't know about meaningful.

Certainly, just with the positive operating leverage, we expect the kind of strong profitability.

We do think that the efficiency will increase -- improve.

Julianna is correcting me.

Improve.

Our next question will come from Matthew Clark of Piper Jaffray.

The mid-single-digit core expense guide, I mean, should we think of that as 5% or 4% to 6% or 3% to 7%?

Just curious how wide of a range you might be thinking about.

We should think about it mid-single digit.

All right.

Just figured I'd try.

And then on leveraged lending getting a lot of attention these days, just wanted to get an update around your exposure there.

Sure.

We have leveraged lending exposure that is about 6% of our total C&I book, about 2% of our total loan book.

Our next question will come from Ken Zerbe of Morgan Stanley.

Just want to be a little more specific in terms of the guidance, speaking specifically on the deposit growth side.

But what are you assuming -- sorry, deposit/securities growth.

But what are you assuming for securities growth in 2019 as well?

Yes.

We're not assuming a substantial increase in our securities portfolio at this point, Ken, for 2019.

Got it.

Okay.

So whatever deposits you have or given the strong deposit growth, presumably, that stayed constant and then it stays relatively, I guess, stable thereafter.

Okay.

And then just really quickly, the second or follow-up question I had.

In terms of your deposit beta, it was good to see that it was actually lower sequentially.

Some of the banks that we talked to have said that they actually expect an acceleration or an increase in deposit costs in the first quarter.

Is that also your expectation?

Or what are you seeing in terms of the pace of deposit beta changes going into first quarter?

Yes.

That's a great question.

We do anticipate given kind of how we're modeling for 2019 that there will continue to be a rise in the deposit costs in the first quarter of 2019, maybe a little bit more as well in the second quarter but at a modest pace relative to where we're at.

And adding to that, we expect that the interest income from the loans and securities and the growth from that will continue similar to the fourth quarter to be in excess of that.

And I'll also share, I think, when we look at the fourth quarter, the actual results versus what we had previously modeled, the cost of deposits, the actual came in at about 90 basis points.

We had modeled maybe 2 basis points under that 88 or so.

So I wanted to just share that with you so you understand kind of what we were thinking versus the actual.

Our next question will come from Lana Chan of BMO Capital Markets.

A couple of questions.

One is on your asset sensitivity.

As we get to sort of maybe towards the later ends of this tightening cycle, any thoughts about potentially moderating your asset sensitivity with swaps or hedges or something else?

Yes.

That's a great question.

Certainly, as we get, it looks like, maybe the end of the rising rate kind of environment, certainly, the forward curve suggests that in the inversion shorter term right now.

Some of the things that we've done and I'll share are, as far as with the C&I loans, putting back floors.

This is something we started late last year below the fully kind of index rate, below the margin, just to make sure, from a balance sheet perspective, that we're protected if rates do decrease.

Additionally, the use of hedges, collars, that is something that we're considering and have discussions at our ALCO for.

We haven't as of yet at the end of December.

But certainly, that is something that we will continue to evaluate as the year progresses.

Okay.

And then just on the other side of that on the deposit costs, we're entering Chinese New Year soon.

I know you guys usually have special CDs around that.

What are your plans for CD promotions?

Yes.

We always do CD promotion around Chinese New Year.

And so this year, again, we will do that.

And we will offer a nice little gift item that is relevant to this year's Chinese New Year theme.

And we think that this will do well.

Now in terms of rate, we actually are offering rate that is lower than what we offer in the third quarter of last year.

Our next question will come from Aaron Deer of Sandler O'Neill + Partners.

Most of my questions have been asked and answered.

Just a question on -- you've discussed a little bit around improving some of your fee-based businesses, in particular, wealth management.

Any chance you'd be looking to do anything on the acquisition front there?

We, at this point, again, because of very nice organic growth, we -- it makes it difficult for us to find meaningful target.

This is kind of like a little bit similar type of discussion we have with the board.

There is always this popular topic that is in the industry right now is that acquisition or stock buyback.

Neither one of them work really well for us because, as you have seen, know that relatively strong organic growth that we have in both loans and deposit.

And then our view is that, if we can do it organically, why deal with other people's problems?

But there are obviously -- there are banks out there that we'll be interested to explore, but then you have to come back down to, is the price reasonable?

And before we get into that, I think right now, we are focusing on our own execution.

And so far, it's turning into some very, very good financial performance.

And so from that standpoint, we try not to be distracted too much.

So organization-wise, I would say that the whole organization, all our associates are pretty much focusing on the day-to-day execution.

Irene and I do occasionally get distracted.

Once in a while, I like to get distracted and look at somebody else's problem and see what potentially that's out there that is suitable for us.

But at this stage right now, I would say that, we don't see a lot of likelihood there will be some major deal that we will be announcing.

Our next question will come from Gary Tenner of D.A. Davidson.

Just a couple of questions here.

On your credit quality table, there was the addition of other NPA item.

Was that something that was in nonaccrual previously or something that popped up new in the quarter?

Yes.

It was something that was nonaccrual before.

And what that line item is, is we foreclosed on some film rights.

There was no associated charge-off with that.

And we do expect to be able to sell that in the near future at par or hopefully above.

Okay.

Great.

And then just another question just broadly on asset quality.

With your guidance for provision in '19, the $80 million to $90 million range, but with sort of steady pace of loan growth next year, is there anything that you're seeing that's giving you sort of an outlook that you might want to increase the qualitative reserves?

Is it the timing of where we are in the expansion cycle?

Maybe just talk about the thoughts around that.

Yes.

That's a great question.

The qualitative reserves for East West continue to be a substantial component of our allowance, ranging 40% to 40%-plus.

Probably at the end of the year, December 31, the qualitative reserve was 44% of the total allowance, so not insignificant.

And we continue to evaluate as far as from macro factors, GDP growth, where the curves are to see are there appropriate qualitative factors that we should add or adjust.

When we look at the projections for 2019, certainly, with the loan growth of 10%, we need to provide for that.

The range that we're looking at, round numbers here, for past related loans is probably 50 to 100 basis points, depending on that.

So in the last few years, we continue to reserve somewhat around those levels, but we've also had the backdrop of a substantial reduction of substandard loans.

At this point in time, substandard loans to total loans, I think it's under 1% as of December 31.

So to expect to continue to draw on that is not likely.

Some of those are the factors that we've looked at as far as with the provision.

But overall, we don't expect a substantial change in our allowance methodology.

Our next question will come from Brock Vandervliet of UBS.

Could you talk about what you're seeing in terms of your Asian subsidiary?

What are activities in China looking like in terms of loans and deposits?

How has the tone changed, if at all, in the last quarter or so?

Well, our Greater China region, the total loan portfolio is $1.3 billion as of today.

And they have continued to grow in a nice pace because -- obviously, because of the -- still, it was so much smaller than United States, so obviously, the percentage growth is higher.

And we deliberately built our cross-border teams and then enhanced the capability and expertise in our Greater China region.

And I do feel that they're making decent progress today because with their knowledge of understanding the U.S.-China current situation and current dynamics, they are able to identify opportunities because the clients value their input, their expertise and their knowledge.

So they are making stride in terms of bringing new customers, one customer at a time.

We are only doing commercial banking business in the Greater China region.

We are not in the retail side.

So, so far, our new relationship are all commercial banking business.

And many of them do have some sort of like U.S.-China cross-border type of activities there.

And I expect that to continue to grow in 2019 and beyond.

Okay.

And as a separate question.

You mentioned the capital call portfolio.

How large is that portfolio?

And how do you see the competitive intensity around that segment?

As of the end of the year, the capital call portfolio, our PE portfolio was about $1.2 billion outstanding, $2 billion commitment.

And so far, they are doing good.

I mean, we started about 5, 6 years ago.

And they continue to grow on a ongoing basis.

And we expect them to continue to be able to do well in 2019 and beyond.

And our next question will come from David Chiaverini of Wedbush.

A couple questions.

So a lot of economists are calling for a slowdown in GDP growth in 2019.

Would you consider slowing your loan growth to below the 10% guidance if you see a slowdown or would you even consider slowing growth preemptively?

Well, I think that's really -- it's not like -- my view is that it's not -- while we deliberately slow down based on -- to be in alignment with GDP and so forth, I think it's more or less like that we need to be substantially more vigilant towards our credit portfolio.

And we started that.

In fact, over 2 years ago, internally, we looked at with the GDP rising for -- 2 years ago, was almost a decade at that time, and then we had a bull market that keep going up.

We have real estate prices keep going up.

Where is the upside?

When we look at the economic situation, we look at those signs over 2 years ago.

We just don't see a lot of upside potential in terms of the economic condition you continue to keep sort of like charging up stronger and stronger and knowing that there's going to be a likelihood -- there's going to be some sort of like a, either slowdown or the stock market have to probably make an adjustment and so forth, which we've seen, in fact, in 2018, and that's sort of anticipated.

And their standpoint -- and that's why we stay vigilant in terms of making sure that we have a very strong underwriting criteria.

And we scrutinize our portfolio in a more robust type of monitoring.

And so those are kind of things that we started working on and building a better credit risk management capability.

And we will continue to stay vigilant and be very careful and looking at our loan portfolio just to make sure that we do not push the envelope too much.

Our organic loan growth that we projected right now, that's our guidance based on what we've seen.

If there is some really, really dramatic situation or any kind of outcome that cause us not be able to originate loans with the kind of like strong underwriting that we expected, obviously, we end up substantially slowing it down.

And so we just kind of like run our business with basic common sense and do what's best for the bank.

I mean, we like to grow, but we never wanted to grow for the sake of potentially taking substantial loan losses.

And that's just going to be contradictory to the East West principles.

So I feel pretty comfortable that, while we put a guidance out there, I mean, after all it is a guidance.

It's not something that we have to stick with it when the economic condition change.

So we will adjust accordingly based on the circumstances.

Frankly, last year, with the U.S.-China situation, it's not like that Day 1. We know, 100% comfortable, that sort of like in crisis we'll find opportunities.

We have to work our way through, too.

So we expect that our loan growth may slow down and may get below our guidance.

Surprisingly, our team executed and ended up getting above it.

It's not because we push it.

It just happened that because somehow we find more opportunities.

So in 2019, who knows what the economic direction is going to go.

But what we do know is that we're going to be looking at every credit portfolio very carefully and making sure that we're doing the right thing.

And if the opportunity is out there, they'll allow us to take on additional new clients and helping our existing clients to expand their business, so be it, and we do more.

But if the opportunity is not there, then obviously, we'll slow down.

So that's what we are.

And as a follow-up to that, have you tightened the lending standards at all over the past couple of quarters or do you plan to over the next couple of quarters?

It varies on different specific type of borrowers or specific industries.

Again, we adjust our credit underwriting based on the circumstances that we see in the market.

And so there's nothing specific that I can share with you, which direction, which particular one that we may tighten up a little bit more here and there.

And then those condition also keep changing, depends on the circumstances we are seeing in the next several months.

And ladies and gentlemen, at this time, we will conclude our question-and-answer session.

I'd like to turn the conference back over to Mr. Dominic Ng for any closing remarks.

Thank you.

Thank you all again on joining our call.

And we're looking forward to speaking to you again in April.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.