Consistent Performer: How Dominic Ng built East West into a powerhouse
For a banker whose business model depends on trade with China, it would be understandable if Dominic Ng is nervous about President Trump's periodic threats to impose tariffs or sanctions on Chinese goods.
But the longtime chairman and chief executive of East West Bancorp sees no cause for alarm.
During his 26 years at East West, he's built it from a $600 million-asset bank into a $36.3 billion-asset California powerhouse with a seat on the front lines of U.S.-China relations. For U.S. businesses that want to trade with China or Chinese companies looking to expand in the states, East West is often their first stop.
Despite the heated political rhetoric about globalization and manufacturing jobs being shipped overseas, trade with China will continue to rise unabated, Ng said, and that bodes well for his bank.
"Chinese companies are here, they are establishing a base here, they are hiring people, and there's really no turning back," the 59-year-old Ng said in an interview from East West's headquarters in Pasadena, Calif. "The increase in trade and investment with China never stops."
From his seventh-floor office with views of the marble dome of Pasadena City Hall, Ng described how he transformed a small savings bank catering to Chinese immigrants into a strong regional performer by focusing on increasing revenues, year in, year out.
His track record is impressive. Under his leadership, East West has hit a new earnings record every year from 1991 to 2017, with three exceptions: 1996, and 2008 and 2009 during the financial crisis (2008 was the only year in which the bank lost money).
This year has continued that remarkable trend. East West's profit increased 31%, to $420.7 million, in the first nine months of the year compared with the same period last year.
In the third quarter, earnings rose 20% from a year earlier, to $132.7 million. Total loans for the quarter went up 15%, to $28.5 billion, while total deposits hit a record $31.3 billion, up 10%. The adjusted net interest margin fattened by 30 basis points, to 3.46%.
"We have consistently been producing numbers like a growth company," Ng said. "What matters is how many customers are coming in and how many we are maintaining."
For building East West into one of the nation's most profitable regional banks while remaining disciplined on credit and effective in executing on his vision, American Banker is recognizing Ng for being a "Consistent Performer" as part of our 2017 Banker of the Year awards.
Ebrahim Poonawala, head of U.S. midcap banks at Bank of America Merrill Lynch Global Research, called Ng one of the most well-regarded bankers with a view into China.
"He has transformed what was a Chinese-American bank into a pretty substantial player in terms of lending and cross-border activity in China," Poonawala said. "If you think about the banking landscape and the top 50 banks, how many CEOs have been at the head of the bank for more than 20 years?"
Few bankers compare with Ng’s longevity and record of profitability.
“He’s done a great job over the years developing a strong group of executives and managers and he’s very well respected within the business community,” said Aaron James Deer, managing director of equity research at Sandler O’Neill & Partners. “Clearly their focus on the Chinese market niche has been a huge tailwind to their growth over the last several years, but they’ve also been a big player in helping U.S. companies get better traction in China. They are facilitating trade in both directions.”
Though there was concern that the Trump administration would create uncertainty for East West's import-export business, Ng thinks the changes are all positive. Trump has not imposed any tariffs or punitive measures against China. Instead, after years of negotiations, the United States has started selling natural gas, beef and rice to the Chinese.
"If you look at nothing else, the only thing different from the Obama era is that we've opened up three more channels to China," Ng said. "Everybody expected something bad to happen, but if you look at the facts, it's the other way around."
Ng called the Trump administration "a little chaotic," but attributed some of the negativity to "noise in the media," which tends "to cover conflict," he said. "There is no question that Commerce Secretary Wilbur Ross and Treasury Secretary Steven Mnuchin are interested in investments in China."
Ng writes a blog on the bank’s web site that explores issues such as what the U.S. can do to deal with the trade deficit. In August, he wrote that “the time is ripe to negotiate, not alienate.”
Because he is on the front lines lending to businesses, Ng has witnessed a stunning turnabout in the dynamics of trade with China.
'If the bank had been focused only on the Chinese American population, we would have cornered ourselves into this little pocket of an area,' said Ng.
In September, he attended a grand opening of BYD Motors, an electric vehicle battery company and U.S. subsidiary of Chinese firm BYD. The company, an East West customer, opened its headquarters in Los Angeles in 2011 with just 10 employees, and now has close to 700. It has been expanding rapidly in Lancaster, Calif., where land is cheap, Ng said, because land prices in China have become too expensive.
“It used to be that we shipped all our jobs to China and they shipped all the goods to Walmart, but now the Chinese are building factories in the U.S.,” he said.
Before becoming a banker, Ng spent 10 years as a certified public accountant with Deloitte & Touche, and prior to that worked at a local venture capital firm called Seyen Investments.
Ng’s advice for anyone launching a banking career is to find a business model that is “expandable, profitable and sustainable.”
When he joined East West as CEO in 1991, he was adamant that it should expand beyond just serving Chinese immigrants.
“I felt very strongly that the better calling was to be a bridge between China and the U.S.,” Ng said. “If we were not actively engaged in the mainstream community, what exactly are we offering to our new immigrant customers from Asia?”
That business model felt too limiting.
“If the bank had been focused only on the Chinese American population, we would have cornered ourselves into this little pocket of an area,” he said.
During Ng’s tenure, East West has expanded dramatically, partly through acquiring other banks. Since 1991, it has bought nine institutions, including two failed banks. The purchase in 2009 of United Commercial Bank in San Francisco doubled East West’s size, briefly catapulting it ahead of City National Bank, now part of RBC, to become the largest bank in Los Angeles. At the time, East West added 63 branches and got a rare banking license in China with offices in Shanghai, Hong Kong and Shantou, China. (Today East West has more than 130 branches, including 10 in China. It trails City National in total assets but is the largest independent bank based in Los Angeles).
In 2010, it bought another failure, Washington First International Bank, in Seattle. Its last acquisition in 2014 was of MetroCorp Bancshares, in Houston.
The majority of East West’s business comes from mainstream commercial banking clients, a point of pride for Ng.
“We get mainstream customers because more of them are asking for that collaboration, that partnership,” he said. “They say to themselves, ‘Who do I ask for an introduction to China?’ So they come to East West Bank.”
In the past decade, East West also has expanded into specialty lending areas that the Chinese government has emphasized, such as entertainment and technology, as opposed to big industrials.
“It speaks to how strategically they think,” Poonawala said. “They’ve made sure they don’t get too heavy in one aspect of the portfolio.”
East West posted 19% annualized loan growth in the third quarter with impressive gains in construction and industrial loans, commercial real estate and specialty lending to private equity, entertainment and energy companies.
The bank has already hit its growth target for the year, said Deer at Sandler. Deer is forecasting a 13% increase in loan balances for the year.
There has been some trouble along the way.
Ng said he wasn’t caught off guard by the housing collapse, but it did some damage nevertheless. Long before the housing bubble burst, he recalls speaking at the 2004 Milken Institute conference and getting booed by the audience for saying, "The American dream will become an American nightmare.”
He saw that lenders were enticing borrowers into taking out loans they would later regret. A native of Hong Kong who got an accounting degree in 1980 from the University of Houston, Ng recalls first coming to Los Angeles and learning of real estate brokers who paid appraisers to inflate the price of homes sold to Chinese immigrants.
"I've seen it all,” he said. “It's so ugly."
'I was not up to par in that area and, when I looked at our peers, they were all driving BMWs and Mercedes and we were the only ones driving a low-end Toyota,' said Ng.
During the run-up to the 2007 housing bubble, Ng said East West "intentionally did not do those loans. We thought it was wrong.”
Still, East West took a hit in 2008, when construction and land loans to homebuilders in Riverside and San Bernardino counties soured. Ng took chargeoffs ahead of schedule and raised capital, despite protests from some investors. Doing so allowed East West to recover and return to profitability in 2009, though not at record levels.
While housing problems weren’t a surprise, Ng was shocked years later in 2015 when the Federal Reserve issued an enforcement action for noncompliance with the Bank Secrecy Act and anti-money laundering rules.
“I was a bit lost as to what exactly the regulators wanted me to do,” he said. “Initially I didn’t know what we did wrong. For years, regulators had looked at [Bank Secrecy Act] issues and we never had any problems."
Once he started digging, however, he discovered East West's systems needed updating. "I was not up to par in that area and, when I looked at our peers, they were all driving BMWs and Mercedes and we were the only ones driving a low-end Toyota," he said.
Ng tripled the staff working on BSA issues to 120 people, doubled compliance staff and increased internal audit staff even as technology expenses climbed. Still, the bank's efficiency ratio remains in the low 40s. "We are very frugal, but we never fail to spend if we feel like we need to," he said.
The issue brought home to Ng the need to invest in the bank’s infrastructure. As a result, he is more focused on cybersecurity issues and on delivering a mobile app connected to a payment system.
“For a bank of their size, when it comes to digital investments ... you don’t want to be the first mover, you want to be a fast follower,” said Poonawala.
It’s not every day that a banker uses the word “selflessness” to describe one of seven guiding principles that employees are expected to adhere to at work.
Over the course of four years Ng crafted a list of core values that he believes have helped contribute to East West’s steady performance.
The list, which he refers to by the acronym “Accrues,” includes absolute integrity, customer-centric principles, creativity, respect, unification or teamwork, expertise and selflessness.
"We are a service organization," he said. "We are here to serve our customers, to serve our shareholders and to serve the community."
Regulators recently audited East West’s sales practices looking for misaligned incentives that might be similar to what caused the Wells Fargo scandal (in which employees opened as many as 3.5 million potentially unauthorized checking and savings accounts without customers’ knowledge).
The examiners were surprised that East West did not have sales goals or even use those terms. Roughly 60% to 70% of branch managers’ pay is based on adherence to the bank’s core values, Ng said.
Though Ng considers the values to be key to East West’s success, he acknowledges that values can only go so far. As he looks to the future, he knows East West will have to keep pace with the technological changes sweeping the industry.
“I can talk all day about bridging East with West, and knowing the culture and having the network here,” he said. “But if we do not know how to do cash management, and if we cannot convert some day to a mobile app tied to a 10-second Alibaba, or cannot manage risk, then we would not be serving our customers.”