TEXT-Fitch affirms East West Bancorp Inc ratings

Wed Oct 24, 2012 12:26pm EDT

Oct 24 - Fitch Ratings has affirmed the long- and short-term Issuer Default
Ratings (IDR) of East West Bancorp, Inc. (EWBC) at 'BBB' and 'F2',
respectively. The Rating Outlook is Stable. A complete list of ratings is 
provided at the end of this release. 

The affirmation of the IDRs reflects EWBC's strong operating performance and 
improving asset quality. However, ratings are constrained due to EWBC's 
aggressive growth in commercial and industrial (C&I) lending and heavy reliance 
on spread income to generate earnings. 

EWBC's earnings remain solid, and continue to outperform its peer group. The net
interest margin (NIM) remains around 4%, and is viewed favorably by Fitch given 
the challenging interest rate environment. Fitch makes various adjustments to 
EWBC's reported earnings related to purchased loan accretion, and the 
indemnification asset. Excluding these items, the adjusted return on assets 
(ROA) and NIM are solid at 1.33% and 4.06% for the nine months ending 2012, 
respectively. EWBC has managed to lower its cost of funding, primarily through 
lower FHLB and time deposit balances; however, long-dated repo agreements 
continue to drag the NIM to the tune of 24 basis points (bps). Fitch 
acknowledges that the NIM could see some downward pressure as EWBC continues to 
replace run-off in its covered loan portfolio with assets originated at lower 
yields. Any presumed pressure to EWBC's NIM would be in line with peers. 

EWBC's loan portfolio includes a large portion of loans originated by the bank, 
as well as approximately $3.2 billion in covered loans acquired primarily 
through its FDIC-assisted acquisition of United Commercial Bank in 2009. The 
inherent credit risk in the covered loan book is considered manageable given the
FDIC loss-sharing agreement. In terms of the non-covered portfolio, which 
comprises 77% of total loans, credit risk trends are moderating, and compare 
favorably to the peer group. Non-performing assets (NPAs) have largely trended 
positively, and loss experience has been modest. Annualized net charge-offs 
(NCOs) through the first nine months of 2012 in the non-covered loan portfolio 
totaled 40bps, and continue to reflect an improving trend. 

Fitch maintains some reservations regarding EWBC's loan growth primarily in its 
C&I book. C&I loans have grown 120% over the past 24 months. This level of 
growth is viewed cautiously by Fitch, especially in light of the competitive 
environment for C&I loans among smaller banks. Given the recent growth, this 
book has not fully seasoned yet, and Fitch will monitor asset quality trends 
closely for any deterioration. 

Fitch considers direct exposure to China to be limited as the acquired China 
book, which represents 1.31% of the non-covered loan portfolio, continues to 
run-off and trade-finance primarily represents short-term import finance loans 
that are not reliant on the Chinese economy. That being said, Fitch will 
continue to monitor EWBC's exposure to China. 

Fitch also negatively views EWBC's heavy reliance on spread income given the 
company's size. EWBC's non-interest income which has averaged around 11% of 
revenue is significantly weaker than its peer group average of 30%.

Capital levels have largely remained stable and in line with 'BBB' rated peers. 
Fitch Core Capital (FCC) to Tangible Assets increased to 8.62% at Sept. 30, 2012
from 8.25% a year earlier. The company has articulated plans to initiate another
share buyback program in 2013 and increase its quarterly common dividend. 
Although EWBC continues to be a strong earner, Fitch views the plan with some 
caution given the company's aggressive C&I loan growth, upcoming regulatory 
changes with regards to risk weighting assets under Basel III, as well as the 
expiring loss share agreement on commercial covered loans in November 2014.  

Rating Sensitivities

EWBC's ratings are considered to be at the higher end of their potential range 
in the medium term given the reliance on spread income and aggressive loan 
portfolio growth. Any upward ratings momentum would be driven by a mature loan 
portfolio with performance history and an increase in fee income to be in line 
with EWBC's peer group. 

EWBC's rating could be downgraded if direct exposure to China increases, 
substantial deterioration in asset quality occurs or earnings come under 
pressure.

Fitch has affirmed the following ratings with a Stable Outlook:

East West Bancorp, Inc. 
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2'; 
--Viability Rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'. 

East West Bank
--Long-term IDR at 'BBB'; 
--Long-term deposits at 'BBB+'; 
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'. 

East West Capital Statutory Trust III, East West Capital Trust IV, V, VI, VII, 
VIII & IX
--Trust preferred securities at 'BB-'.
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