Fitch Ratings has affirmed East West Bancorp (EWBC) ratings at 'BBB/F2'. The Rating Outlook remains Stable. The affirmation reflects the bank's strong profitability and solid franchise.
The rating action follows a periodic review of the large regional banking group, which includes BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), First Horizon National Corp. (FHN), First National of Nebraska, Inc. (FNNI), First Republic Bank (FRC), Fulton Financial Corp (FULT), People's United Financial Inc. (PBCT), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Webster Financial Corp. (WBS), Wintrust Financial Corp (WTFC), and UMB Financial Corporation (UMB).
Company-specific rating rationales for the other banks are published separately.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
EWBC's ratings were affirmed reflecting its strong franchise and earnings performance. EWBC has a solid franchise, which is focused on serving Asian American communities. In Fitch's opinion, the Asian-American market is an attractive niche with strong growth potential in the U.S. banking sector (please see Fitch special report "U.S. Ethnic Affinity Banks: Asian-American Banks" available at www.fitchratings.com). EWBC is well positioned as the largest Chinese-American institution in the U.S. with over $28 billion in assets. EWBC's favorable market position has translated to higher pricing power on its consumer lending products. While deposit mix and cost of interest-bearing liabilities appear weak relative to many of its mid-tier regional banking peers, Fitch notes than EWBC has a meaningfully higher portion of non-interest deposits and lower cost of funds than comparable Asian-American banks.
Fitch views EWBC's earnings as a rating strength, driven by solid spread earnings, modest overhead expenses and low credit costs. During 2014, EWBC reported a return on assets (ROA) and net interest margin (NIM) in excess of peers as strong performance of the covered loan portfolio accelerated yield accretion. While Fitch expects the benefit of yield accretion to decline, Fitch expects EWBC's earnings to remain in the top quartile of the peer group.
EWBC's ratings are further supported by continued improvement in asset quality metrics. EWBC's construction and development (C&D) loan portfolio, which has declined by over 70% since its peak, was the largest driver of credit losses through the cycle. As such, Fitch views the reduced exposure to higher risk C&D loans and improvement in the non-covered portion of impaired assets positively.
Despite improving asset quality measures, Fitch views EWBC's continued growth in commercial loans negatively. Fitch notes the rate of growth in 2013 and 2014 suggests that EWBC may be increasing its risk appetite, loosening underwriting standards and growing beyond its core business of serving the ethnic Chinese-American community. Although not currently expected, continued growth in excess of peers and the broader economic environment or deterioration in credit performance could result in a negative credit action in the near- to intermediate-term.
EWBC's capital levels continue constrain ratings. Capital ratios have trended down in recent periods as the result of continued growth, share repurchases and corporate dividends. Fitch core capital declined to 10.74% of total risk weighted assets as of third quarter 2014 (3Q'14), down from 11.44% at year-end 2013. Although capital levels are still currently in line with mid-tier peers, Fitch will continue to evaluate asset growth relative to the company's capital management and risk profile.
RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT
Positive rating momentum is limited in the near term given the bank's recent growth and capital levels. Moreover, if loan growth does not moderate or asset quality begins to show signs of deterioration, particularly in newly originated commercial loans, negative credit action could occur.
EWBC's ratings are also highly sensitive to its capital levels and its performance on recently submitted regulatory capital stress tests. Negative rating action could result if capital is managed down further or the bank receives unfavorable stress test results.
RATING SENSITIVITIES - HOLDING COMPANY
Should EWBC's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely though for EWBC, given the strength of the holding company liquidity profile.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
EWBC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, EWBC is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
EWBC's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.
KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by EWBC and by various issuing vehicles are all notched down from EWBC or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of subordinated debt and other hybrid capital issued by EWBC and its subsidiaries are primarily sensitive to any change in EWBC's VR.
KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY
East West Bank is a wholly owned subsidiary of EWBC. East West Bank's ratings are aligned with EWBC reflecting Fitch's view that the bank subsidiary is core to the franchise.
RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY
East West Bank's ratings are sensitive to changes to EWBC's VR or any changes to Fitch's view of structural subordination between bank subsidiary and holding company. Rating sensitivities for the VR are listed above.
To the extent that one of EWBC's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from EWBC's IDR.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
EWBC's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by EWBC and its subsidiaries are primarily sensitive to any change in EWBC's long- and short-term IDRs.
Fitch has affirmed the following ratings with a Stable Outlook:
East West Bancorp, Inc.
--Long-term IDR at 'BBB'; Outlook Stable
--Short-term IDR at 'F2';
--Viability Rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'.
East West Bank
--Long-term IDR at 'BBB'; Outlook Stable
--Long-term deposits at 'BBB+';
--Short-term IDR at 'F2';
--Short-term deposits at 'F2';
--Viability Rating at 'bbb';
--Support at '5';
--Support Floor at 'NF'.
East West Capital Statutory Trust III, East West Capital Trust IV, V, VI, VII, VIII & IX
--Trust preferred securities at 'BB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--U.S. Banking Quarterly comment: 4Q14 (Jan. 28, 2015)
--U.S. Banks: The Risks with Energy Slide (Jan. 16, 2015)
--U.S. Basel III and Dodd Frank Act Regulatory Guide (Nov. 21, 2014)
--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)' (Nov. 12, 2014);
--'U.S. Banks: Implications of an Interest Rate Shock Scenario' (Oct. 30, 2014)
--U.S. Banks: Liquidity and Deposit Funding (Aug. 08, 2013);
--U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (June 18, 2013);
--U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? (July 11, 2013);
--'Index Trend Analysis - 4Q14 (Fitch Fundamentals Index Remains Neutral)' (January 2015);
--'Risk Radar Global 3Q14' (Sept. 15, 2014);
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);
--'Rating Considerations for U.S. Bank Holdco & Opcos' (Update on Position Outlined in 1Q14) (Dec. 1, 2014)
--U.S. Ethnic Affinity Banks
Applicable Criteria and Related Research:
U.S. Ethnic Affinity Banks: Asian-American Banks (Concentration Risk and High Cost of Deposits Offset Strong Capitalization)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=786488
Rating Considerations for U.S. Bank Holdco & Opcos (Update on Position Outlined in 1Q14)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821068
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
Assessing and Rating Bank Subordinated and Hybrid Securities Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137
Rating FI Subsidiaries and Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Risk Radar Global 3Q14
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568
U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539
U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875
U.S. Banks: Liquidity and Deposit Funding
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196
U.S. Banks: Implications of an Interest Rate Shock Scenario
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=800748
2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809228
U.S. Basel III and Dodd Frank Act Regulatory Guide (Applicability of New Bank Regulations in the U.S.)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=798848
U.S. Banks: The Risks with Energy Slide
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=854268
U.S. Banking Quarterly Comment: 4Q14 (All Eyes on Oil Prices and Interest Rates)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=849388
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978971
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