Fitch Upgrades East West Bancorp's LT IDR to 'BBB+'; Outlook Stable

Published: 2025-03-05 04:34:11 ET EWBC

Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of East West Bancorp, Inc. (EWBC) and its operating subsidiary, East West Bank to 'BBB+' from 'BBB'.

The Rating Outlooks are Stable. Fitch has also upgraded the Viability Ratings (VRs) of both entities to 'bbb+' from 'bbb' and affirmed the Short-Term IDRs at 'F2'.

Key Rating Drivers

Standalone Profile Underpins IDR: The upgrade reflects EWBC's strong earnings power, unique business profile, and robust capital levels. The company is exposed to potential deterioration in relations between the U.S. and China, given its cross-border business lines and loan concentration. However, EWBC has maintained above-peer profitability levels despite a higher tariff environment, and Fitch does not expect the bank's profitability to be materially affected by additional tariffs.

EWBC's management has a track record of successfully navigating geopolitical uncertainties by maintaining profitability, capital levels, and managing loan losses. The bank's maintenance of high CET1 ratios provides flexibility for unexpected high-loss situations.

Unique Franchise; Solid Business Model: EWBC's position as a Chinese-American affinity bank differentiates its franchise in a highly competitive market. This offers a stable core funding base and lending opportunities, as well as increased opportunities for cross-border growth with many existing clients. However, its subsidiary in China and Hong Kong branch together accounted for only 6% of total consolidated assets and 4% of total consolidated revenue through YE24. Additionally, the bank has diversified via specialized industry portfolios.

Risk Management Offset by Concentrations: EWBC's risk profile has been constrained by loan concentration in California commercial real estate (CRE), mitigated by robust underwriting and a proactive approach to assessing loan portfolio credit quality. Total loan increased 3% year-over-year as of YE24, which is muted compared to prior years. Fitch expects loan growth to remain in the mid- to low-single digits through 2025 driven by growth in residential mortgages and the commercial & industrial portfolio. EWBC is a spread-reliant bank and is better positioned for a rising rate environment, but it manages interest rate risk through cash flow hedges.

Robust Capital Supports Higher Charge-Offs: EWBC's impaired loans-to-gross loans ratio increased to 69 basis points through YE 2024 from 40 basis points at YE 2023, but it remains below the peer median. The net charge-offs (NCO) ratio rose to 26 basis points as of YE 2024 from 9 basis points at YE 2023, which is higher than EWBC's historically low NCO levels and above the peer median. However, Fitch considers EWBC's robust capital levels capable of absorbing above-peer levels of NCOs.

Fitch expects EWBC's NCO ratio to remain elevated compared to prior years in 2025, but believes it is unlikely to result in a change in ratings, given the headroom under the current ratings, strong earnings generation, and robust capital levels. Additionally, reserve coverage is appropriate and continues to be above that of most peers.

Strong Earnings Power: EWBC continues to have a strong earnings profile, with an operating profit-to-risk-weighted assets (RWAs) ratio of approximately 2.7% through YE24. Over time, the bank has proven more profitable than higher-rated peers, justifying its elevated earnings and profitability factor score of 'a-'. Given EWBC's higher proportion of variable-rate loans, Fitch expects profitability will be supported in a higher, albeit declining, rate environment.

Capital Levels Managed Above Peers: EWBC's common equity Tier 1 (CET1) ratio increased to 14.3% as of YE24 from 13.3% at YE23 and continues to be well above regulatory minimums and those of peers. Additionally, the potential impact of EWBC's unrealized losses in available-for-sale and held-to-maturity securities is manageable. Through YE24, if marked for these losses, CET1 would be expected to decline to approximately 13%. Fitch expects EWBC will opportunistically repurchase stock in 2025 but will continue to maintain its CET1 ratio at the higher end of the peer group.

Time Deposit Mix to Gradually Slow: As interest rates have remained elevated, EWBC's deposit mix has continued to shift to time deposits, with time deposits increasing 29% year-over-year as of YE24. Fitch expects this trend to moderate slightly in 2025 due to rate cuts in the 2H24 that will be priced into the 2025 Lunar New Year CD rates and additional rate cuts in 2025. However, Fitch expects time deposits to continue making up the largest portion of deposits in the rating horizon because EWBC's customers will likely continue to take advantage of the elevated rate environment.

The bank's loans-to-deposits (LTD) ratio declined to 85% as of YE24 from 93% as of YE23 due to muted loan growth. Fitch expects the LTD ratio to increase slightly in 2025 given moderate loan growth expectations but to remain at levels consistent with its rating.

Holding Company Notching: The Viability Rating (VR) is equalized with the Long-Term IDR of the operating bank, reflecting its role as the bank holding company, which is mandated in the U.S. to be a source of strength for bank subsidiaries. The equalized ratings reflect Fitch's view of a very close correlation between holding company and subsidiary failure, and default vulnerability. Additionally, as of YE24, EWBC has low double leverage, and fixed coverage is strong due to expenses at the holding company level.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Disruptions in economic or political relations with China such that the bank experiences sustained periods of declines in profitability.

A significant deterioration in asset quality that drives impaired loans to gross loans to meaningfully exceed 2% with a likelihood of remaining above that threshold for multiple quarters as well as credit losses out of line with peers.

A decline in the CET1 ratio such that it dips below 12% and remains there for multiple quarters, absent a credible plan to build levels back above this threshold. The ratings would also be sensitive to a change in capital management that results in a rapid decline in capital.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch views EWBC's current ratings as well situated. Positive rating momentum could develop over time through increased geographic diversification and revenue diversification, provided this diversification is achieved prudently and without significantly increasing the bank's risk appetite, while continuing to successfully navigate economic and geopolitical uncertainty such that key metrics are not negatively affected.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Long- and Short-Term Deposit Ratings: EWBC's long-term, uninsured deposits are rated one notch higher than the bank's Long-Term IDR, as U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. Fitch rates the short-term uninsured deposits 'F2' in accordance with its 'Bank Rating Criteria,' based on the bank's long-term deposit rating and Fitch's assessment of its funding and liquidity profile.

Government Support Rating - Government Support Rating (GSR) of 'ns' reflects Fitch's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign if EWBC and East West Bank becomes non-viable.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Long- and Short-Term Deposit Ratings: The long-term deposit ratings are sensitive to any change to EWBC's Long- Term IDR. EWBC's short-term deposit rating is sensitive to any change to the bank's long-term deposit rating and Fitch's assessment of its funding and liquidity profile.

Government Support Rating: The GSR would be sensitive to any change in U.S. sovereign support, which Fitch believes is unlikely.

VR ADJUSTMENTS

The Asset Quality score of 'bbb+' has been assigned lower than the implied score of 'aa' due to negative adjustments for Concentrations and Historical & Future Metrics.

The Capitalization and Leverage score of 'bbb+' has been assigned lower than the implied score of 'a' due to a negative adjustment for Capital Flexibility.

The Funding and Liquidity score of 'bbb+' has been assigned lower than the implied score of 'a' due to a negative adjustment for Deposit Structure.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.