The industry consensus is that investors care more about capital and credit than wide earnings misses for the second quarter, and East West Bancorp Inc. in Pasadena, Calif., is a case in point.
Late Wednesday the $12.7 billion-asset company reported a loss of $92.1 million, or $1.83 a share, as chargeoffs spiked. Analysts had expected it to post a loss of 42 cents a share on average.
Despite the disappointment, its stock jumped 15% Thursday, to close at $7.39.
"People have stopped reacting to losses," said Julianna Balicka, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "Investors are looking at capital and credit management rather than whatever numbers you post."
East West has just bulked up on capital, and analysts credited it with actively identifying problem loans starting early on in the economic downturn. They chalked up its $151.4 million provision for loan losses in the second quarter to more of the same and interpreted it as comforting rather than worrisome.
The company attributed its hefty loss mostly to the provision, up 78% from last year and 94% from the previous quarter. It also took a $37.4 million other-than-temporary impairment charge on the trust-preferred securities it owns.
In an interview Thursday, Dominic Ng, East West's chairman, president, and chief executive officer, said its "decisive action" now would pay off.
"While it makes the current earnings ugly and creates shocking numbers that people don't appreciate, in the long run it's the best way to mitigate risk," Ng said.
He had told analysts on a conference call Thursday that East West opted to perform the government's stress test on its own loan portfolio. Under the worst-case scenario, the test showed that the company needed an additional $101 million of capital to maintain a 4% level of tangible common equity to risk-weighted assets.
So this month East West increased its capital by $148.4 million. "With this capital cushion, we believe we are well positioned to withstand this prolonged economic downturn and challenging credit environment," Ng said on the call.
The company's tangible common equity ratio is at 7.25% following three transactions to boost capital.
East West said it raised $27.5 million in a private placement of common stock this week. It converted the preferred shares of three investors earlier this month, adding another $90.3 million in common equity. Last month it desecuritized some mortgages, to gain $31 million in common equity.
Analysts said the company, which was already more assertive than others in dealing with credit-quality deterioration, quickened the pace for cleaning up its balance sheet too.
The company shed $222 million of problem assets, by selling $55.8 million of real estate owned and $166.3 million of loans. At July 31, other real estate owned totaled $27 million, down 30% from the previous quarter.
"We significantly ramped up our efforts to sell problem loans," Ng said on the call. This approach was primarily used for loans where the guarantors had run out of liquidity and the project was not complete, or where the borrower had filed for bankruptcy.
"We strongly believe that as the credit cycle continues, problem assets do not age well and that quickly disposing of these loans was the best course of action," he said.
In the interview, Ng also said he does not believe in letting issues fester.
"It is like having cancer and not dealing with it. If you let it just keep going, it eventually gets to the point where there is no return," he said. "When we see something start going, we strike it hard and resolve as much as we can."
Joe Gladue, an analyst at B. Riley & Co. Inc., said East West is doing a good job of preparing itself for the other side of the credit cycle.
"It looks like the company is really trying to be very aggressive at getting the asset-quality problems behind them as much as they can and clearing the deck, so to speak," he said.
"The feeling is they accelerated a lot of losses that would have come later on, but things won't be as bad going forward, and they improved their capital position. The view is they are in a better position than they would have been without all these losses, provisions, and charges they took in second quarter, painful as they were."