East West Bank of San Marino, Calif., reported an impressive 29% increase in deposits for the second quarter, but it still was not enough to keep pace with a 47% jump in loans.
The upshot is that at June 30, its loan-to-deposit ratio was at 106.6%, up from 90% a year earlier and well above industry averages for a bank its size.
That ratio is one reason why the $4.9 billion-asset bank, which caters to Chinese-Americans, has come out with an unusual certificate of deposit that ties its yields to the returns of a Chinese stock index.
Though the above-average ratio does not appear to be hindering East West’s growth and investors hardly seem worried — its stock was trading at a 52-week high late Thursday — senior vice president and treasurer Mitch Kitayama said the bank would like to accelerate deposit growth.
“We’re growing deposits fairly well, but loan demand is extremely strong,” Mr. Kitayama said Thursday. “We’re hoping that this product — as well as others we’ll be introducing in the future — will help us bring in deposits not only from the Chinese-American community, but also from the general population.”
East West unveiled the Greater China Investment Index Certificate of Deposit on Monday. Its yields are linked to the Hang Seng China Enterprise Index, which tracks the overall performance of China’s 37 state-owned enterprises listed on the Hong Kong Stock Exchange.
Julia Gouw, the chief financial officer at East West’s parent, East West Bancorp Inc., said the product is aimed at customers “who would love to participate in the stock rewards of high-growth Chinese companies, but who don’t want to lose a lot of money” in the high-risk market there.
Customers do not actually invest in the Chinese index, but they are paid returns on their CDs similar to what they could have received if they had invested, Mr. Kitayama said. East West funds those returns by conducting interest rate swaps in the derivatives market.
Customers invest a minimum of $5,000 in the CD, whose principal is insured by the Federal Deposit Insurance Corp., up to $100,000. Purchasers can choose between two options on the amount of returns they would like to receive.
One option is a guaranteed minimum return of 1%, with the chance of receiving a higher return based on the performance of the Chinese index. East West will pay customers anywhere from 70% to 85% of the average price of the Chinese index posted each quarter during the five-and-a-half years of the instrument. (The bank does not want to give an exact percentage, in case it fails to hedge the CDs adequately in the derivatives market.)
Under the second option purchasers can forgo a minimum return and hope to receive an even higher return; East West will pay them anywhere from 85% to 95% of the average quarterly price of the Chinese index.
East West will stop selling the new CD after Aug. 16 but may offer it again as part of a series of CDs offering variable rates of return, Mr. Kitayama said.
East West is mainly marketing the CD in Chinese-American newspapers and in its branches, but Ms. Gouw said, “This is great for the average person here who wants to participate in the China play.”
Brett D. Rabatin, an analyst with First Horizon National Corp.’s FTN Midwest Research Securities Corp. in Nashville, said the new CD is a smart way for East West to gather more deposits — something it needs after a sustained period of torrid loan growth.
“Their loan engine has been unbelievably strong, mainly because of the strong commercial real estate market in southern California,” Mr. Rabatin said. “That’s created a balance sheet where liquidity is relatively limited, so they’ve now become more focused on deposit gathering.”
East West, like other Asian-American banks, spends more of its energy marketing CDs and other money market accounts than in attracting demand deposits, because customers in those communities tend to prefer time deposits over cash in a checking account earning no money, Mr. Rabatin said. The ratio of money market deposits to demand deposits is generally 10% to 15% higher at Asian-American banks than the industry as a whole, and East West is no exception, he said.
During the second quarter nearly 47% of East West’s deposits were in money market accounts, while about 27% were in noninterest-bearing accounts. (It reported its results for the period earlier this month.)
Mr. Rabatin said East West can use the new CD to its advantage in competing with its neighbors for money market deposits.
