East West Bank forecasts higher expenses, reserves in 2023

East West sees higher expenses, loan-loss provisions in second half

July 20, 2023 6:46 PM

East West expects provisions for credit losses to total between $110 million and $130 million by the end of the year. That is up from last year, when East West set aside $73.5 million for potential sour loans.

East West Bancorp warned Thursday that noninterest expenses and provisions for credit losses will rise in the second half of 2023.

It cited hiring plans, anticipation of loan growth and a changing economic outlook since the first quarter as the reasons for those likely moves.

"Things are a lot different than they were at the start of, and in the middle of, April," Chief Financial Officer Irene Oh said on a call with analysts to discuss the Pasadena, California, bank's second-quarter results. "That's certainly part of the reflection on what are the expenses and investment that we need to sustain the growth."

Here are details of East West's forecast for the remainder of the year and highlights from its earnings report.

Expenses

East West raised its noninterest expense guidance for the remainder of 2023. Expenses are likely to rise between 9% and 11% on the year, the bank said. That is higher than previous guidance of 8% to 9%.

The bank expects to spend more on hiring and sees opportunities to grow its front-line and back-office staff in the near term, executives said.

"We're not overinvesting; we never overinvest," East West CEO Dominic Ng said on a call with analysts Thursday morning. "East West always invests incrementally in terms of technology, operation infrastructure and hiring."

Noninterest expenses totaled $205 million in the second quarter, up 13% from $181 million a year ago.

Some of the anticipated increase in expenses could come from the hiring of bankers formerly employed by Silicon Valley Bank

Loss provisions

The $68 billion-asset bank expects provisions for credit losses to total between $110 million and $130 million by the end of the year. That is up from last year, when East West set aside $73.5 million for potential sour loans.

Overall credit quality remains strong, and criticized loans fell in the second quarter from a year earlier. The bank says it has yet to see the same signs of a return to a pre-pandemic credit environment that other banks have reported in recent months.

Net interest income

Net interest income totaled $567 million in the second quarter, down 5.5% from the first quarter and below expectations.

Lower-than-expected earnings on loans and securities "accounted for the vast majority" of difference between EastWest's reported net interest income and the higher level expected by analysts, David Rochester, director of research at Compass Point Research, wrote in a note.

Cheaper borrowing costs for EastWest during the quarter helped to partially offset softer net interest income.

Deposits

Deposits spiked in April after customers spooked by a series of bank failures looked for new places to keep their funds.

"We wanted to be extraordinarily cautious and prudent...we did not need that much in deposits to come in," Ng said.

More normalized deposit growth returned in the second quarter. Deposits totaled $55.7 billion at the end of June, up from $54.7 billion at the end of the first quarter.