With $200 million of fresh funding, East West Bancorp Inc. in Pasadena, Calif., has given itself a line of defense against future losses if California's housing market does not recover soon.
However, some analysts say the capital is just as likely to be used to execute a move from East West's offensive playbook.
East West is already considered well capitalized — its total risk-based capital ratio at March 31 was 10.59%. For that reason, analysts said the additional funds could be used to make loans other banks might be apprehensive about originating, or even to buy a smaller, troubled bank.
Any meaningful growth is unlikely to take place until East West can manage through the effects of the stalled housing construction market in Southern California, analysts said.
In its first-quarter earnings report April 15, East West recorded a $55 million provision, mainly for losses on residential construction and land development loans. As a result, net income fell 88% from a year earlier, to $5 million.
The $11.8 billion-asset company said last week that it raised the capital through an offering of convertible preferred stock. The offering initially was priced at $150 million but was oversubscribed by investors who were looking for bank stock bargains and were optimistic about East West's long-term prospects, analysts said.
In announcing the offering's proceeds last week, East West's chairman and chief executive Dominic Ng made it clear that boosting capital levels was his company's immediate priority. The additional funds have increased its risk-based capital ratio to 12.31%.
"We expect that the capital infusion will position the bank for stronger growth as the economy strengthens and keep our capital ratios at very healthy levels as we contend with current economic conditions," Mr. Ng said in a press release.
About 20% of East West's loan portfolio is in residential construction and land development loans, including a fair amount made in California's Inland Empire region east of Los Angeles, which has been hit particularly hard by the real estate downturn.
Analysts said that conditions in Southern California's housing markets were still too uncertain to conclude whether the company's provision would decrease, hold steady, or rise in future quarters.
"It's really tough to gauge what chargeoffs and provisions are ultimately going to be," but the capital infusion "certainly gives them the flexibility to aggressively address any credit challenges that they do face," said Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP in San Francisco.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, said that over the next several quarters, he expects other banking companies whose total risk-based capital ratios have fallen below 11% to increase capital, because of worsening credit quality.
"It's prudent to get the capital now when you can, and not when you have to," Mr. Rabatin said.
The $2.1 billion-asset AmericanWest Bancorp of Spokane said in its earnings conference call last week that within the next two months it plans to announce an offering, probably of preferred stock, to raise its capital levels, Mr. Rabatin said. Its total risk-based capital ratio was 10.02% at March 31.
AmericanWest lost $31.6 million in the first quarter, mostly as a result of a $27 million goodwill impairment charge, but also because of a $12.8 million provision for losses on residential construction and land development loans. A year earlier it did not post a provision, and it reported earnings of $2.2 million.
Joseph K. Morford 3rd, an analyst with Royal Bank of Canada's RBC Capital Markets in San Francisco, said East West also may use the proceeds to reduce Federal Home Loan bank borrowings, a move that likely would boost its net interest margin, which was 3.63% at March 31.
Once the operating environment improves, East West also could use some of its additional capital to pursue loans others cannot or will not make, because they are apprehensive or have weakened capital levels, Mr. Morford said.
"And while it may be premature today, coming out of this there may be opportunities for East West to buy some smaller banks in their market," particularly those who have been significantly weakened because of the downturn, he said.
In the week after its earnings report East West's stock price had fallen 21%, to $12.56 as of April 23, but the stock has regained much of that loss since the company announced the stock offering and the total proceeds. As of late Tuesday the stock was trading at $14.38 a share.
