East West Bancorp - Li Lu's 6th Largest Position (NASDAQ:EWBC)
With 30Y Treasury yields at 3.85%, what premium would investors pay for an EWBC-issue 11.75% Perpetual Bond? Plus, a quick-dive US CRE industry primer + risk analysis of EWBC's CRE loan portfolio
EWBC Bank Metrics At A Glance — LTM ROA: 1.9%, ROE: 20%, ROTCE: 21%, LTD: 89%, Average LTV: low-50%. Loan loss coverage ratio: 1.27%, NPA/Total Assets: 0.14%, Average deposit size: $40-375k. CET1: 12.5%, RWCR: 12.5%. Top 50 US Bank by Assets.
Li Lu’s 6th Largest Position — Himalaya Capital Management’s latest 13F filing (Mar 31) showed that it entered a new position in EWBC 0.00%↑. Li Lu invested in about 2.3 million shares of EWBC, allocating 5.5% of the firm’s equity portfolio to the stake and making it his 6th largest stake. Li Lu’s average entry price was around $69 — the current stock price is $54, ~20% below Li Lu’s entry price.
What If Warren Buffett Ran A Bank? — EWBC is a value investor’s dream bank. Conservative B/S positioning; Proactive risk management; Highly diversified loan portfolio mix with low-50% LTV across the board. Its current 6.6x PE reflects a highly pessimistic ST outlook, with LT balance of risks lopsided to the upside.
“No called strike” management style — In 1Q23 earnings call, the CEO alluded to the bank’s current growth strategy being to simply maximize flexibility and wait for new opportunities to arise amidst the current uncertain banking environment. This is akin to Buffett’s “no called strike” investing — where he does nothing but watch bad pitches go by while waiting for the perfect one to fall into his sweet spot.
Competitive returns at Lower risk — EWBC has always operated conservatively; and amidst mid-March’s SVB Financial turmoil, management dialed back the bank’s risk even further. However, EWBC has still managed to crank out an industry-leading 20% ROE despite its risk-first mandate.
Springloaded for Optionality — EWBC’s highly flexible capital position gives it plenty of growth opportunities when the US economy eventually turns around. Its commoditized business nature is a double-edged sword in terms of controlling its destiny, but also rewards it with little effort once the business environment improves. Its robust balance sheet makes downside risk nigh acceptable.
Asymmetric Risk:Reward — EWBC’s current valuation does not appear to be pricing in any potential for a wider economic recovery whatsoever. At 6.6x trailing PE, EWBC’s share price is screaming: "What could possibly go right?" Li Lu’s recent stake in EWBC aligns with Benjamin’s Graham quote, “An investment operation is one which upon thorough analysis promises safety of principal and an adequate return”.
#1 Spot in S&P Global Market Intelligence Ranking — In March, EWBC earned the top ranking in a 2022 S&P Global Market Intelligence analysis of financial performance at the largest US public banks, which included banks with greater than $10 billion in total assets as of the end of 2022.
$EWBC Bank At A Glance
1Q23 Bank Metrics — Highlights from 1Q23 Earnings Call Deck
Commercial Real Estate (CRE) — Is the Sector & EWBC’s Loan Portfolio Going To Be Fine?
If you identify as a value investor, the following excerpts from EWBC’s 1Q23 Earnings Call (Apr 20) will do a better job of appealing to you than anything I could ever say myself. Here are the relevant quotes (emphasis mine, but with slight edits for readability):
“But on the other hand, we are very prudent, because we have never declined to just jump into the playground — we don’t just want to be participating and then end up getting burned. That’s just something that won’t happen in East West.
So I do feel that maybe in the next 12 months to 24 months, we will probably have more opportunity than, let’s say, the last few years. But there should be more opportunity, that’s just logical thinking, but whether there would be something coming up, I don’t know.”
“Therefore, maybe we actually do too much, but this is what I always reflect on, with us further pushing over 20% of return on equity, over 2% of ROA, and look at the regional banks around and then comparing with us, I said, wow, we are pretty good. S&P just gave us the Number One Best Performing Bank ranking last month.”
“So I look at it as that, we are doing pretty good right now. Let’s not overstretch ourselves and get ahead of the pack. So in that standpoint, that’s why as you heard from Irene, that’s why we put up $3.75 billion of the swap and collar right in the middle one, we are in a rising interest rates, asset sensitive, enjoy the margin expansion and instead of like going for 4.5%-odd margin increase quarter-after-quarter, we dialed it back down.
We started to dial it back down even early last year and we continue to dial it back down even during this crisis and we just got $500 million and dialed it back down immediately — and the whole idea is that, hey, even with all of that, we still cranked up over 20% return on equity.
So why stretch? Because as long as we keep doing this salsa, managing the balance sheet prudently, but be extremely aggressive in terms of ensure we perform to the best we can, opportunity will come, because then we will eventually position ourselves at a level that would attract others to make more on the joint force with us.
So I look at it is that we have no control of what other people would do, but we do have controls on what we can do and we are going to continue to keep working hard to make sure that we crank up one of the best-performing metrics.
And then in the meantime, making sure the capital stays high. So we have all kinds of flexibility and then making sure our liquidity stay high. So there will have all kinds of flexibility to do what we need to do, and managing the credit risk the best we can so that we do not go sideways when the opportunity comes.
And that’s what we have been doing for the past many years. I have been in the bank for 30 years now. So just the same old single thing, one crisis or new crisis, managing the same way, one at a time and all looked up and so far, so good.”
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$EWBC Bank At A Glance
1Q23 Bank Metrics:
Total Loans: $48.9B (LTD ratio: 89%)
CRE loans: 67% of total loans (see below for more info)
C&I loans: 18% (below peer median of 24%)
Residential Mortgage & Others: 28%
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