TEXT-Fitch affirms East West Bancorp Inc ratings
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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