“East West Bancorp targets Asian Americans, so you’re just less likely to switch banks if somebody literally speaks Mandarin, versus maybe another bank that doesn’t,” said CFRA Research analyst Alexander Yokum. “So, it’s a big advantage they have just from a stickiness perspective.”
“Banking is obviously very competitive. There’s thousands of banks in the United States. And if you can compete off something besides price, you have an advantage,” he added. In April, the analyst reiterated a strong buy rating on the stock. His 12-month price target of $105 implies more than 40% upside from Thursday’s close.
American dream = home ownership
Part of what’s helping East West succeed with Asian Americans goes all the way back to its origins. East West Bancorp was founded in 1973 as a federal savings and loan in the Los Angeles area to service the Chinese American and immigrant community struggling to obtain mortgages and business loans.
Since then, the bank has expanded significantly, with more than 100 locations across the U.S. and Asia, as well as almost $71 billion in assets as of March 31.
But the residential mortgage business remains a key differentiator for East West, which works with recent immigrants who may not necessarily have all the documentation required by a more traditional bank for home ownership. These include certifications such as a social security number, tax ID number, or documented income and employment history.
“Some of their customers that are coming over to the U.S., they might not have all the requirements for a conforming mortgage, and they’re utilizing East West to get a mortgage for their home,” said Wells Fargo analyst Timur Braziler. “But the company knows these borrowers, knows this sub sector of the population really well.”
That means the bank can charge more up front than it would for a conforming mortgage, which meets guidelines set by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency, as well as charge a higher interest rate, said the analyst — who has a buy rating and $85 price target on the stock, according to FactSet. Wells Fargo’s target implies further upside of almost 16% over the next year.
“It becomes pretty attractive when you can charge a higher rate for this mortgage, you’re getting better leverage, meaning the customer is putting more money down, into the property,” Braziler said. “And you’re doing it in an asset class not many others are participating in.”
In fact, finance chief Christopher Del Moral-Niles said East West aspires to have its residential mortgage loan portfolio make up one-third of its total loans; it’s currently just shy of that, at 29%.
“All communities seem to share a desire to follow the American dream of homeownership, and if it wasn’t being made available to Chinese Americans, East West founders were going to find a way to make that possible, and they did,” Del Moral-Niles said. “And we continue to do that today in a way that other banks don’t.”
“I think that’s an opportunity that we feel has been a core component of our offering, and is a core differentiator of our solutions,” Del Moral-Niles added.
That has helped East West hold onto its customer base, especially as it has evolved from the Cantonese-speaking population that first came to the U.S. to a community reflecting a broader diaspora.
Steven Leung, who lives in New York City’s Chinatown, said his oldest business account is with East West Bancorp, where he says he’s banked for more than 20 years.
“We know all the personnel here already, so it’s really helpful. We need something, they can help us,” Leung said. “We know all the teller, all the bank manager, all the personnel here.”
Cross-border trade
East West Bancorp has also tried to become the go-to commercial lender for Chinese American entrepreneurs here and abroad, an international orientation that unusual for a regional U.S. bank.
It first opened a location in Beijing in 2003, and then based its China operations out of Shanghai in 2009. It’s one of just a few U.S.-based banks to have a full banking license in China. East West also drives cross-border activity between the U.S. and other Asian countries, such as Thailand and Vietnam.
“That’s a role usually played sometimes by larger international banks, but for this sub market — for the Asian community, smaller businesses — we have played a key role, and have grown with many of those to be a sizable player in that cross border market,” Del Moral-Niles said. “Which is somewhat unique for a regional bank.”
To be sure, strong ties with China are also a potential challenge for East West as geopolitical and trade tensions rise between Washington and Beijing. But CFO Del Moral-Niles is quick to remind people East West is centrally a U.S. based bank with just four branches in Asia.
Strong capital management
For investors, what’s most attractive about the regional bank is the conservative approach of its customer base to savings, as well as by its leaders to capital management.
“Asian Americans are, generally speaking, above-average income, below average in terms of defaulting on their loans,” CFRA’s Yokum said. “So, it is a good demographic to go after.”
Meanwhile, East West Bancorp’s Common Equity Tier 1 (CET-1) ratio, is a capital ratio that measures a bank’s capital in relation to its risk-weighted assets, stands at 13%. A typical bank has a CET-1 ratio between 10.5% and 11%, Yokum said.
“In part because the bank founders were fairly conservative, and in part because [CEO Dominic Ng] is fairly conservative, the entire approach has been first and foremost, ‘let’s remain one of the strongest, best capitalized banks in the industry.’ From that position of strength, we can do what we need to do to drive the business,” CFO Del Moral-Niles said.
“And when your customers come to recognize you as that strong bank, then, when things start to go sideways for other banks, you become an attractive alternative for them, and a place where people go to when things get rocky for others,” Del Moral-Niles added. “And that’s worked out well for us over time, and certainly in the last year.”
