I need to be transient right here, so let me simply say that East West Bancorp (NASDAQ:EWBC) is among the most tasty banks out there within the U.S. market. The financial institution has a robust franchise, a diversified enterprise mannequin, a sturdy stability sheet, and a confirmed observe file of progress and profitability. East West Financial institution additionally has a novel aggressive benefit in serving the Asian-American group and facilitating cross-border commerce and funding between the U.S. and China.
East West Financial institution simply so occurs to be the biggest publicly traded financial institution in Southern California, with over 120 branches throughout 9 states and 4 worldwide places. The financial institution presents a wholesome vary of private and business banking, dwelling loans, wealth administration, and worldwide banking companies to its prospects. East West Financial institution has a loyal and rising buyer base, with over $64 billion in complete belongings and over $55 billion in deposits as of March 31, 2023.
One of many the explanation why East West Financial institution is undervalued is that many buyers and analysts overlook it. The financial institution doesn’t obtain a lot media consideration or analyst protection, regardless of its robust fundamentals and progress prospects. Nonetheless, some savvy buyers have acknowledged the worth and potential of East West Financial institution and have been shopping for its shares.
Li Lu is the founding father of Himalaya Capital Administration and a trusted associate of Charlie Munger, the legendary vice chairman of Berkshire Hathaway (BRK.A)(BRK.B). Munger has given Lu the very best praise by calling him “The Chinese language Warren Buffett” and entrusting him together with his private wealth – one thing he has solely achieved as soon as in his 99 years. Lu has a knack for locating long-term worth alternatives and a deep understanding of China and Asia. He initiated a stake in East West Financial institution within the first quarter of 2023, snapping up nearly 2.30 million shares at a median worth of $55 per share.
Li Lu’s stake in East West Financial institution is a robust sign of the financial institution’s high quality and worth. It additionally reveals his conviction within the financial institution’s talent to deal with the dangers and rewards within the U.S.-China relationship, which is a vital driver for East West Financial institution’s progress.
East West Financial institution is a novel alternative within the banking sector that delivers progress, worth, profitability, stability, and aggressive edge. The financial institution stands to realize from the demographic tendencies, and the rising commerce and funding flows between the U.S. and China.
In case you are on the lookout for a top-notch financial institution inventory with large upside potential, it is best to seize East West Financial institution at its present steal worth.
EWBC’s Distinctive Progress Prospects
EWBC has a loyal and diversified buyer base of people, companies, and establishments that worth its cultural understanding, language capabilities, and specialised services and products. The financial institution has a number one market share in key metropolitan areas with excessive concentrations of Asian Individuals, similar to Los Angeles, San Francisco, New York, and Seattle. The financial institution’s company profile asserts that “East West is the main financial institution serving the Asian group within the U.S.”
EWBC has a novel aggressive benefit in its area of interest market of serving the Asian American group, which is among the fastest-growing and most prosperous segments within the U.S. In keeping with the U.S. Census Bureau, the Asian American inhabitants grew by 28% from 2010 to 2020, in comparison with 7.4% for the entire U.S. inhabitants.
This demographic can be the only most prosperous within the nation. The median family revenue for Asian Individuals was $98,174 in 2019, in comparison with $68,703 for the entire U.S. inhabitants. It ought to go with out saying, however this bodes properly for the financial institution’s deposits.
EWBC additionally has a robust presence in Higher China, with branches in Hong Kong, Shanghai, Shantou, and Taipei, and consultant places of work in Beijing, Chongqing, Guangzhou, Xiamen, and Shenzhen. The financial institution leverages its cross-border experience and community to facilitate commerce and funding flows between the U.S. and Higher China, in addition to to serve Chinese language firms and people working or investing within the U.S.
EWBC has ample alternatives to develop its mortgage portfolio, deposit base, price revenue, and market share in each its home and worldwide markets. The financial institution has expanded its department community, digital capabilities, product choices, and buyer segments to seize extra enterprise alternatives and improve buyer loyalty.
EWBC’s Superior Profitability and Efficacy
EWBC has constantly delivered stable profitability and effectivity metrics through the years.
|Return on belongings (ROA)||1.9%||0.98%|
|Return on common fairness (ROE)||20.72%||10%|
|Internet curiosity margin (NIM)||4.24%||2.97%|
The above chart reveals that EWBC is a extremely worthwhile and environment friendly financial institution that outperforms the trade common on a number of key metrics. EWBC has a robust aggressive benefit in serving the Asian American market, which is the fastest-growing and highest-income racial group within the U.S. EWBC leverages its distinctive cross-border banking capabilities, its loyal buyer base, and its diversified mortgage portfolio to generate superior returns for its shareholders.
EWBC’s return on belongings (ROA) of 1.9% is sort of double the trade common of 0.98%, indicating that the financial institution could be very efficient in utilizing its belongings to generate revenue. This displays EWBC’s capacity to take care of excessive asset high quality, low working bills, and robust price revenue from its wealth administration and treasury companies.
EWBC’s return on common fairness (ROE) of 20.72% in comparison with the trade common of 14%, indicating that the financial institution could be very worthwhile for its shareholders. This displays EWBC’s capacity to leverage its capital effectively, develop its earnings constantly, and pay out dividends often.
EWBC’s internet curiosity margin (NIM) of 4.24% is considerably increased than the trade common of two.97%, indicating that the financial institution has a excessive unfold between its curiosity revenue and curiosity expense. This displays EWBC’s capacity to draw low-cost deposits from its Asian American prospects, who are likely to have increased financial savings charges and decrease default charges than different teams. It additionally displays EWBC’s capacity to lend at increased charges to area of interest segments similar to business actual property, leisure, and expertise.
EWBC’s mortgage/deposit ratio of 84% is increased than the trade common of 62%, indicating that the financial institution is extra aggressive in lending out its deposits. This displays EWBC’s confidence in its credit score underwriting and danger administration practices, in addition to its progress alternatives in each the U.S. and China markets.
General, the chart reveals that EWBC is a well-managed and well-positioned financial institution that has a transparent aggressive edge in serving the Asian American group. The financial institution has a stable observe file of delivering superior monetary efficiency and shareholder worth, and has ample room for additional progress and enlargement.
EWBC’s robust profitability and effectivity are pushed by its diversified income streams, disciplined expense administration, prudent danger administration, and strong capital place. The financial institution generates income from each curiosity revenue and non-interest revenue sources, similar to wealth administration charges, overseas alternate charges, letters of credit score charges, swap charges, and different service expenses.
The financial institution additionally retains its working bills below management by optimizing its department community, leveraging expertise, and streamlining processes. The financial institution manages its credit score danger by sustaining a high-quality mortgage portfolio with low non-performing belongings and internet charge-offs ratios. The financial institution additionally maintains a robust capital place that exceeds regulatory necessities and offers flexibility for progress.
EWBC’s Excessive Undervaluation
First, we are able to check out essentially the most related valuation insights.
- P/E of 5.68
- P/B of 1.09
- Tier 1 Capital Ratio (12.70%)
My favourite of all, the financial institution almost trades at its tangible e book worth per share, which is about $42.46. Now on to my valuation; for banks, I are likely to want the Extra Return Mannequin for valuation moderately than a DCF. I carried out my mannequin as follows:
I Discovered the present fairness capital of EWBC. That is the e book worth of fairness or shareholders’ fairness reported on the stability sheet. As of March 31, 2023, EWBC had a complete fairness of $6,018 million.
I seemed on the projected ROE and COE of EWBC. You need to use historic information, analyst estimates, trade averages, or different strategies to estimate these values. For simplicity, I’ll use the ROE and COE reported by Yahoo Finance EWBC had a trailing 12-month ROE of 16.95% and a COE of 9.00%.
Then, I used the anticipated progress charge of EWBC’s fairness capital. For simplicity, I’ll use the EPS progress charge assumption of 12.5%.
Subsequent up, I calculated the surplus return for annually of the forecast interval. I used a five-year forecast interval (2023-2027). The method for extra return is: Extra Return = (ROE – COE) x Fairness Capital.
I Calculated the terminal worth of EWBC’s extra returns. I used the perpetual progress methodology with a terminal progress charge of three.0%, which is barely increased than the long-term inflation charge. The method for terminal worth is: Terminal Worth = Extra Return x (1 + Terminal Progress Price) / (COE – Terminal Progress Price)
Discounted the surplus returns and terminal worth to their current values utilizing the COE because the low cost charge. The method for current worth is: Current Worth = Future Worth / (1 + Low cost Price) ^ Variety of Intervals
Summed up all the current values of extra returns and terminal worth to get the current worth of anticipated extra returns.
Added the present fairness capital and the current worth of anticipated extra returns to get the worth of EWBC’s fairness.
Divided the worth of EWBC’s fairness by the variety of shares excellent to get the intrinsic worth per share.
Listed here are the outcomes of my extra returns mannequin on EWBC:
- The present fairness capital of EWBC is $6,018 million.
- The projected ROE and COE of EWBC are 16.95% and 9.00%, respectively.
- The anticipated progress charge of EWBC’s fairness capital is 12.5%.
- The surplus returns for annually of the forecast interval are:
|Yr||Fairness Capital||Extra Return|
The terminal worth of EWBC’s extra returns is $15,098 million.
The current values of extra returns and terminal worth are:
|Yr||Extra Return||Current Worth|
The current worth of anticipated extra returns is $11,413 million ($494 + $509 + $520 + $529 + $537 + $8,824).
The worth of EWBC’s fairness is $17,431 million ($6,018 + $11,413).
The intrinsic worth per share of EWBC is $122.71 ($17,431 / 142.1).
The present share worth of EWBC is $48.50. Due to this fact, EWBC is undervalued by 153% primarily based on my extra returns mannequin.
I assign a purchase ranking at current ranges and contemplate this funding a long-term holding. Traders all in favour of EWBC needs to be ready to carry it for five years, give or take.
The Buffett Bonus
The Cherry on prime of this compelling case is Li Lu’s newly initiated place in EWBC.
Li Lu’s funding in EWBC additionally offers the financial institution a possible connection to Warren Buffett and Berkshire Hathaway, which may open up extra alternatives for progress and collaboration. Warren Buffett has expressed his admiration for Li Lu and his funding abilities and has stated that he can be comfortable to have Li Lu handle a few of Berkshire Hathaway’s cash.
EWBC is among the few banks that has attracted the eye and funding of Li Lu, who’s broadly thought to be probably the greatest buyers on the planet and a potential successor of Warren Buffett. This can be a bonus for EWBC shareholders, who can profit from Li Lu’s experience, perception, and affect.
Insiders have additionally proved to have vital confidence within the inventory, with over 2.1 Million in insider share shopping for within the final 3 months.
This might not be a correct write-up if it didn’t embrace any potential dangers to your funding. I recognized two very actual threats to EWBC inventory over the mid to long run.
Elevated Working Bills: EWBC’s working bills have been rising over the previous a number of years, primarily on account of increased compensation and worker profit prices, which account for about 60% of its complete non-interest bills. The financial institution expects adjusted non-interest bills (excluding tax credit score funding & core deposit intangible amortization) to extend 8-9% this yr, which may harm its profitability and effectivity. The financial institution faces stress to speculate extra in expertise, compliance, and advertising and marketing to stay aggressive and meet buyer expectations, which may additional enhance its prices. The financial institution additionally faces regulatory and authorized dangers that might end in fines, penalties, or litigation bills.
U.S.-China Commerce Tensions: EWBC’s enterprise is very depending on its cross-border experience and community between the U.S. and Higher China, which accounts for about 20% of its complete loans. The financial institution facilitates commerce and funding flows between the 2 areas, in addition to serves Chinese language firms and people working or investing within the U.S. Nonetheless, the connection between the U.S. and China has been strained by commerce disputes, geopolitical conflicts, human rights points, and cybersecurity threats. Any escalation of tensions or imposition of sanctions or tariffs may adversely have an effect on EWBC’s cross-border actions and revenues, in addition to expose it to forex fluctuations and political dangers.
EWBC is a traditional instance of the infant being thrown out with the bathwater. This can be a uncommon alternative for buyers to scoop up a financial institution with superior progress, a stable moat, and confidence from administration and Himalaya Capital. I like to recommend shares be acquired at current values to seize a big margin of security.