Fitch Affirms East West Bancorp's LT IDR at 'BBB'; Outlook Stable

Published: 2024-03-21 06:01:22 ET EWBC

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

The Rating Outlooks are Stable. Fitch has also affirmed the Viability Ratings (VRs) of both entities at 'bbb', and the Short-Term IDRs at 'F2'. A full list of rating actions is below.

Key Rating Drivers

Standalone Profile Underpins IDR: EWBC's Long-Term IDR at 'BBB' reflects the company's strong earnings power, solid asset quality and unique business profile as a Chinese-American affinity bank. The Outlook is Stable despite Fitch's expectations for deteriorating economic conditions and a more challenging operating environment, which may result in NIM compression and normalization in asset quality. EWBC's core credit metrics have sufficient headroom to withstand cyclical deterioration. EWBC's exposure to deteriorating relations between U.S. and China, given its cross-border business lines, also limits the firm's current ratings.

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 in assessing the credit portfolio. While loan growth in 2023 was 8% and above peer median, Fitch expects loan growth to further decline to mid- to low single digits in 2024 as the economy moves into a soft landing and growth in the CRE portfolio becomes muted. As a spread reliant bank, EWBC is exposed to interest rate risk, but is mitigated through cash flow hedges.

Unique Franchise; Solid Business Model: EWBC's position as a Chinese-American affinity bank differentiates its franchise in a highly competitive market. While this offers a stable core funding base and lending opportunities, as well as increased opportunities for cross-border growth with many of their existing clients, the subsidiary in China and the Hong Kong Branch together only make up 6% of total consolidated assets and 3% of total consolidated revenue. EWBC is spread reliant with only 11% of revenue coming from non-interest income. Additionally, the bank has diversified through its specialized industry portfolios.

Capital Levels Managed Above Peers: Fitch expects EWBC will continue to manage its common equity Tier 1 (CET1) ratio well above regulatory minimums and the peer average, and to accrete capital through earnings throughout 2024. In Fitch's view this is reflective of EWBC's strategy to maintain sufficient capital buffers. At YE 2023, EWBC's CET1 ratio was 13.3%, up 60 bps from YE 2022, and well above most peers. Additionally, the potential impact of EWBC's unrealized losses in available-for-sale and held-to-maturity securities is manageable. If marked for these losses, CET1 would be expected to decline to approximately 11%.

Asset Quality Sound: EWBC's impaired loans to gross loans ticked up slightly in 2023 (0.40%) compared to 2022 (0.34%), but remains below the four-year average. While there was a slight increase in net charge-offs to average gross loans in 2023 compared to 2022, it remains at historical lows at 9 bps. Additionally, reserve coverage is appropriate and continues to be maintained above that of most peers. Following loan growth of 16% in 2022, which was EWBC's highest level of loan growth in the past four years, Fitch anticipates impaired loans and net charge offs to increase modestly as previous years' loans become seasoned while maintaining reserve coverage levels, but is unlikely to result in a change in ratings given EWBC's ratings headroom.

Strong Earnings Power: EWBC continues to demonstrate a strong earnings profile, with an operating profit to risk weighted assets of 2.72% as of 2023. Over time, the bank has consistently proven more profitable than higher rated peers, with a four-year average of operating profit to risk weighted assets that remains above peer medians, justifying its elevated earnings and profitability factor score of 'a-'. While the bank continues to build out fee revenue business lines, EWBC remains a highly spread reliant bank. As a highly spread reliant bank, Fitch anticipates that there may be a decline in EWBC's operating profit to risk weighted assets as rate cuts are expected this year, but is unlikely to impact ratings as Fitch anticipates EWBC will remain in line with peers.

Time Deposits Continue to Increase: As rates have remained elevated, EWBC's deposit mix continues to shift from demand deposits to time deposits with noninterest bearing deposits declining 26% and 8% YoY in 2023 and 2022, respectively, driven by customer migration to higher yielding deposit products in an elevated rate environment. This resulted in the average cost of deposits increasing to 2.19% in 2023 from 0.46% in 2022.

Despite the industry disruption in 1Q23, total deposits increased in 2023 compared to 2022 and marks four consecutive years of deposit growth. While EWBC's loan-to-deposit ratio has risen to 93% at YE 2023, in Fitch's view, EWBC liquidity profile is appropriate for the rating with elevated on-balance sheet liquidity as well as sufficient borrowing capacity available to meet back up liquidity needs. Fitch anticipates EWBC's loan-to-deposit ratio to decline in 2024 due to lower loan growth.

Holding Company Notching: The VR is equalized with 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. Ratings are equalized, reflecting Fitch's view of a very close correlation between holding company and subsidiary failure, and default vulnerability. Additionally, as of 2023, EWBC has no double leverage and given low level of expenses at the holding company level, fixed coverage is strong.

Rating Sensitivities

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

A significant deterioration in asset quality could drive negative rating action. Pressure could emerge if impaired loans to gross loans was to meaningfully exceed 1.5% and be expected to remain above that threshold for multiple quarters. Additionally, credit losses out of line with peers, especially attributable to the bank's CRE portfolio, could create negative ratings pressure.

Outsized deterioration in the level or volatility of the bank's earnings, relative to peers, could drive negative rating action.

Additionally, the bank's rating would be at risk if CET1 were to approach or ultimately dip below 10%, and remain there for multiple quarters absent a credible plan to build levels back above this threshold. Fitch would also be sensitive to a change in capital management resulting in a rapid decline in capital.

Attrition of customer deposits that results in requiring a significantly higher reliance on wholesale borrowings or brokered deposits could drive negative ratings pressure.

EWBC's ratings are sensitive to disruption in economic or political relations with China, given the bank's direct and indirect exposures to the nation. Events such as sanctions by the U.S. or the imposition of capital controls by China could have a negative impact on EWBC's ratings.

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

Over the rating horizon, sustained earnings performance, accompanied by sound asset quality and risk management, could drive positive ratings momentum following subsidence of current economic and geopolitical uncertainty. Additionally, this would incorporate Fitch's expectation that EWBC will continue to maintain higher-than-peer levels of capital, given the elevated risk appetite with regards to loan growth.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Long- and Short-Term Deposit Ratings: East West Bank'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. East West Bank's short-term, uninsured deposits rating of 'F2' is at the lower end of the two options for a long-term deposits rating of 'BBB+' as the firm's funding and liquidity score of 'bbb+' is below the threshold score required to achieve the higher rating.

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 in the event that 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 negative change in the company's long-term deposit rating and Fitch's assessment of East West Bank's 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

EWBC's VR has been assigned below the implied VR due to the following reason: 'weakest link financial profile KRD Risk Profile.

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 www.fitchratings.com/topics/esg/products#esg-relevance-scores.