East West Bancorp, Inc.

Q4 2022 Earnings Conference Call


spk08: And welcome to the East-West Bancorp's fourth quarter and full year 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Juliana Balika, Director of Investor Relations. Please go ahead.
spk01: Thank you, Vaishnavi. Good morning, and thank you, everyone, for joining EastWest Bancorp's fourth quarter and full year 2022 earnings call with Dominic Ng, our Chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer. This call is being recorded and will be available for replay on our Investor Relations website. During their remarks, Dominic and Irene will reference a slide deck that is available on our Investor Relations site. Management may make projections or other forward-looking statements which may differ materially from the actual results due to a number of risks and uncertainties, and management may discuss non-GAAP financial measures. For more detailed descriptions of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to our filings of the Securities and Exchange Commission, including the Form 8-K filed today. I will now turn the call over to Dominic.
spk12: Thank you, Juliana. Good morning, and thank you, everyone, for joining us for our earnings call. I will begin the review of our financial results with Slide 3 of our presentation. A strong financial performance in 2022 was characterized by strong revenue growth, which was driven by strong loan growth and net interest margin expansion in a rising interest rate environment, combined with disciplined expense management and solid and stable asset quality. Together, all these drivers result in industry-leading profitability, both for the full year and the fourth quarter of 2022. EastWest achieved record earnings of $1.1 billion or $7.92 per share for the full year of 2022, an increase of 30% year-over-year. Our 2022 total revenue of $2.3 billion was our highest ever and grew 29% year-over-year. Our pre-tax Pre-provision income of $1.6 billion grew 40% year over year in 2022. We returned a 1.8% on assets and 21% on tangible equity for the full year. Now, for the fourth quarter of 2022, we reported net income of $337 million and earnings per share of $2.37, which grew 55% annualized quarter over quarter. Our industry leading returns were 2.1% on assets and 25% on tangible equity for the fourth quarter. Our fourth quarter pre-tax, pre-provision profitability was nearly 3%. Now let's go to slide four, and slide four presents a summary of our balance sheet. As of December 31st, 2022, Total loans reached an all-time high of $48.2 billion, an increase of $771 million, or 6% annualized from September 30. Fourth quarter average loan growth was likewise 6% annualized. Average loan growth in the fourth quarter was well balanced between our major loan portfolios of commercial real estate, residential mortgage, and commercial and industrial. Total deposit were record 56 billion as of December 31st, 2022, an increase of 2.1 billion, all 16% annualized from September 30. For fourth quarter average deposit growth was 7% annualized. Growth was driven by time deposits reflecting a successful branch-based CD campaign during the fourth quarter. Our deposit book is well diversified by deposit type, and 38% of total deposits were in non-interest bearing demand deposits as of December 31st. Our loan to deposit ratio decreased to 86% as of the end of the year, from 88% as of September 30th. Turning to slide five, as you can see in the exhibit on this slide, all our capital ratios expanded quarter over quarter. As of December 31st, 2022, we had a common equity tier one ratio of 12.7%, a total capital ratio of 14%, and a tangible common equity ratio of 8.7%. Quarter over quarter, our book value and our tangible equity per share increased 6%. I'm pleased to announce that EastWest Board of Directors approved a 20% increase to the quarterly common stock dividend from 40 cents per share to 48 cents per share, and equivalent to an annual dividend of $1.92 per share. The new dividend will take effect in the first quarter, payable on February 21st, 2023, to stockholders of record on February 6th, 2023. Moving on to a discussion about loan portfolio, beginning with slide six. As of December 31st, 2022, CNI loans outstanding were 15.7 billion, sequentially up 2% annualized and up 11% year over year. Our CNI portfolio is well diversified by industry and sector. Slide seven and eight show the details of our commercial real estate portfolio, which is well diversified by geography and property type and consists of low loan to value loans. Total commercial real estate loans were 19.1 billion as of December 31st, 2022, up 8% annualized from September 30 and up 18% year over year. In slide nine, we provide details regarding our residential mortgage portfolio, which consists of single family mortgages and home equity lines of credit. Our residential mortgage loans are primarily originated through East West Bank branches. I would highlight that 82% of our HELOC commitments were in a first lien position as of December 31st, 2022. Residential mortgage loans totaled $13.3 billion as of December 31, 2022, up 9% annualized from September 30, and up 19% year-over-year. I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement. Irene.
spk09: Thank you, Dominic. I'll start with our asset quality metrics and components of our allowance for loan losses on slides 10 and 11. The asset quality of our portfolio continues to be stable and strong. Quarter over quarter, criticized loans decrease 1%, and the criticized loans ratio improves 5 basis points. Both classified and special mention loans decrease from already low levels as of September 30th. At year end, the non-performing asset ratio was 16 basis points of assets, unchanged quarter over quarter. Charge-offs continue to be at low levels. During the fourth quarter, we recorded net charge-offs of $10 million, or eight basis points, compared with net charge-offs of six basis points in the third quarter. Our allowance totaled $596 million as of December 31st, or $124 of loans, up from $123 as of September 30th. During the fourth quarter, we recorded a provision for credit losses of $25 million, compared with $27 million for the third quarter. While asset quality remains strong and the current credit environment is benign, we continue to remain vigilant about credit. We're actively monitoring the loan portfolio and taking proactive measures to build our allowance for loan losses. And now, moving to a discussion of our income statement on slide 12. This slide summarizes the key line items of the income statement, which I'll discuss in more detail on the following slides. Of note, amortization of tax credit and other investments in the fourth quarter was $65 compared to a $20 million in the third quarter. At the same time, the quarterly effective tax rate was 13% in the fourth quarter compared to a 23% in the third quarter. This fluctuation is due to tax credit investments that were closed in the fourth quarter and the related projects that were placed into service. This resulted in a lower effective tax rate and an increase in the amortization expense for the fourth quarter. For the full year of 2022, the effective tax rate was 20%. I'll now review the key drivers of our net interest income and net interest margin on slides 13 through 16, starting with average balance sheet. As Dominic mentioned in his remarks, fourth quarter average loan growth, 6% annualized, was well balanced among our major loan portfolios, and average deposit growth of 7% annualized reflected a successful branch-based deposit campaign. Our average loan-to-deposit ratio was stable quarter-over-quarter at 87%. Average non-interest-bearing demand deposits date up 39% of our average deposits in the fourth quarter. Turning to slide 14, fourth quarter 2022 net interest income of $605.5 million was the highest quarterly net interest income in the history of East-West, growing 39% lend quarter annualized. Our net interest margin of 398 expanded 30 basis points quarter over quarter. As you can see from the waterfall chart on the slide, net interest margin expansion in the fourth quarter reflected the impact of higher loan and earning asset yields, which increased the net interest margin by 82 basis points, partially offset by 52 basis points of compression from the funding side. Our net interest income growth benefited from rising benchmark interest rates, because of our asset sensitive loan portfolio. To preserve net interest income when interest rates go down, we added 3.25 billion of swaps and callers in 2022, which included one billion added early in the fourth quarter. Turning to slide 15, the fourth quarter average loan yield was 559, an increase of 84 basis points quarter over quarter. The average loan yield comprised an average coupon yield of 553, plus yield adjustment, which contributed six basis points to the overall loan yield in the fourth quarter. As of December 31st, the spot coupon rate of our loans was $592. In this slide, we also present the coupon spot yields for each major loan portfolio for the last five quarter ends. You can see the positive impact of rising interest rates on each of the loan portfolios as loans have repriced. 61% of our loan portfolio was variable rate, including 30% linked to the prime rate and 27% linked to LIBOR or SOFR rates. I would also highlight that over 40% of our variable rate commercial real estate loans have customer level interest rate derivative contracts in place. To clarify, this is distinct from the balance sheet hedging I discussed a minute ago. With the customer level derivative contracts, We've helped our customers enter into loan-level interest rate swaps, callers, and caps, currently structured to help protect customers against rising debt service costs. At the same time, the loans remain variable rate on our balance sheet, and the bank benefits from the asset sensitivity. Turning to slide 16, our average cost of deposits for the fourth quarter was 106 basis points, off 55 basis points from the third quarter. Our spot rate on total deposits was 134 basis points as of December 31st, a year-over-year increase of 125 basis points. This translates to a 29% cumulative beta relative to the 425 basis point increase in the target Fed funds rate over the same period. In comparison, the cumulative beta on our loans has been 58%, as our loan coupon spot rate increased 248 basis points year over year. We started the rising interest rate cycle from a position of strength, with historically high levels of demand deposits for East West Bank and strong liquidity. This has bolstered the asset sensitivity benefits of our variable rate loan portfolio, supporting strong revenue growth through the cycle. We are pleased with the lag in deposit beta cycle to date. This has come through careful deposit cost management. With a 29% cumulative data cycle to date, we are outperforming prior rising interest rate cycles. With 39% of our average deposits in interest-bearing accounts, and with the growth that we have had in treasury management products and services since before the pandemic, we feel comfortable about continuing to navigate the current cycle well. Moving on to fee income, on slide 17, total non-interest income in the fourth quarter was 65%, down from 76% in the third quarter. Customer-driven fee income and net gains on sales of loans were 66 million, down 4.5%, or 18% annualized from the third quarter, and up 4% from a year ago. Year over year, we saw growth across most of our fee income lines of business. Moving on to slide 18, fourth quarter non-interest expense was $257 million. Excluding amortization of cash credits and other investments and core deposit and tangible amortization, adjusted non-interest expense was $192 million in the third quarter, down 2% quarter-by-quarter or 7% annualized, driven by lower compensation and employee benefits expense. Once again, we generated strong positive operating leverage with total revenue growth of 27% annualized in the fourth quarter, plus a sequential decrease in expenses. The fourth quarter adjusted efficiency ratio was 29% compared to 31% in the third quarter. Our adjusted pre-tax pre-provision income grew 43% link quarter annualized, and our pre-tax pre-provision ROA was an attractive 295 in the fourth quarter. And with that, I'll now review our updated outlook for the full year of 2023 on slide 19. For the full year 2023 compared to 2022, we currently expect year-over-year loan growth in the high single-digit percentage range. We expect production from all of our major loan portfolios in 2023. Year-over-year, we expect net interest income growth in the low 20% rate range. Underpinning our interest income assumptions is the forward interest rate curve as of year end which assumes a peak Fed funds target rate of 5% by April 2023 and a year-end Fed funds target rate of 475, with a cut late in the year. In our modeling, we assume that deposit betas will continue to rise in 2023. Adjusted non-interest expense growth, excluding tax credit and investment amortization, in the range of 10% to 11%. We expect our revenue and expense outlook to result in positive operating leverage year over year. In terms of credit, for 2023, the provision for credit losses will largely be driven by changes in the macroeconomic outlook. We are providing our expectations for gross charge-offs, which are expected to be in line with our recent gross charge-off experience if macroeconomic conditions stay stable. For context, the gross charge-off ratio was eight basis points 2022 and 17 basis points in 2021. Asset quality today is excellent, and the potential losses from any problem loans are limited. However, realistically, if the economic background weakens, we would expect to see some credit normalization from the very low levels today. In terms of tax items, we currently expect that approximately $150 million of tax credit investments excluding low-income housing tax credits will close and go into service in 2023 and therefore be part of our tax rate calculation for the full year. The tax credit amortization related to these tax credits should be approximately 95% of the tax credit investment amount for the full year. For the first quarter of 2023, we expect that 92 million of these tax credits will be reflected in the tax rate calculation, the tax credit amortization to be approximately 22 million for the quarter. There will be quarterly variability in the tax rate and the tax credit amortization due to the timing of tax credit investments placed into service. With that, I'll now turn the call back over to Dominic for closing remarks.
spk12: Thank you, Irene. In closing, 2022 was an excellent year for EastWest with our highest ever earnings, revenue, loans, and deposits and the achievement of industry-leading profitability metrics. Our annual earnings now exceed $1 billion. We look forward to 2023 with excitement as we celebrate our 50-year anniversary. The bank and our customers have come a long way since 1973. Throughout our history, the pillar of our success has been and continues to be our spirit of going above and beyond to service our customers. We are honored to be the bank of choice for our clients and wish to thank all our associates for their dedication and contribution to making our bank a success. Lastly, I want to take this opportunity to wish everyone a happy Lunar New Year. May the Year of the Rabbit bring health, prosperity, and happiness to all of us. I will now open up the call to questions. Operator.
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Dave Rochester with CompassPoint. Please go ahead.
spk14: Hey, good morning, guys. Nice quarter. Sure. My first question is on the NII guide. On slide 16, you guys highlight the total deposit beta, 29%. You got 47% interest-bearing deposit beta through the end of last year. I was wondering what deposit beta you're baking in to the guide at this point. I know you mentioned you expected deposit beta to rise through this year, but are you thinking mid-30s or upper 30s for the overall cycle? Are you baking in something higher than that and And then how do you think about deposit growth from here and what that means for borrowing levels, which are still very low? Thanks.
spk09: Yeah, great question, Dave. At this point in time, we're modeling that full cycle beta will be 40% for 2023 and at the same time for interest-bearing deposits, a deposit beta of 60%. And that's factored in with our NII guidance that we have of the increase in the low 20%. Overall, I think with the good growth that we've had in deposits in general, along with our successful campaigns for CDs that are lower than other competitors in the market, at this point in time, I think we'll be able to continue to fund our loan growth with the deposits. Certainly, we're very opportunistic to look at that from the perspective of cost.
spk14: Great. And then just one follow-up. On the back end of the year, when you include your Fed rate cut, I'm curious what you're expecting for the deposit cost movement as a result of that cut. Are you thinking that you'll get immediate benefit, or are you thinking there might be a little bit of a lag there with the first couple cuts? Thanks again.
spk09: Yeah, I think it's still late in the year at this point, the expectation around that. We're not making that a day.
spk02: Great. Thanks.
spk08: The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
spk11: Hi, good morning.
spk09: Morning.
spk11: I wanted to ask on the hedges that you've been putting on the books, can you speak to how those might impact loan betas for both the remaining of the rate cycle, the rate hike cycle, and also when the Fed begins cutting rates? And, you know, also how much more you plan to do on your hedging efforts from here?
spk09: Yeah, great question. Certainly the specifics of how much that's impacted us, quarter date, I do not have that, but, you know, we can get that information after the call. Certainly as we started adding this, you know, fourth quarter, third quarter, there was a little bit of impact as far as largely against the CRE loans that we've kind of hedged. We have 3.25 billion of swaps and also callers that we've put on at this point in time, you know, in discussion with our ALCO committee. There's probably another couple billion that we would look to do, but certainly we're opportunistic about this and also evaluating the overall balance sheet and the positioning of that. So that's something that we'll continue to evaluate to see what we think makes the most sense given the changes in the interest rate environment as well.
spk11: Got it. And is there a bottom we can think about on NIM in the event the Fed begins cutting, or is that too early to say right now?
spk10: I think it's too early to say. You answered your own question.
spk11: Sorry, again. Fair enough. And then, you know, just on credit, in November you emphasized, you know, like everyone else, you've been watchful for a normalization on credit, and you're focused on early detection of any cracks. In the reviews that you've been making, have there been any covenant breaches or any other cracks to note?
spk09: I mean, I think certainly on an individual loan basis, that is happening, right? But overall, I think we're very positive from the perspective that on credit, as we do continue to do these reviews on our commercial books, our consumer books throughout, you know, what's positive is there are not a lot of new problem loans. Same loans that we were working through last couple years continue to be things that we work through, but not a lot of new problems in that process. So that's certainly something that we feel is positive and positions as well.
spk12: Yeah, we've been actively managing the loan portfolio overall. So as you can see in the criticized asset percentage is relatively benign. So far, surprisingly, asset quality is very, very good. And we looked at the rising interest rate. Obviously, that's why we've been aggressively managing the portfolio and see how it goes. And I always do this ongoing loan review. And so far, so good.
spk08: The next question comes from Ibrahim Poonawalla with Bank of America. Please go ahead.
spk07: Hey, good morning. I guess maybe just sticking with asset quality. So I appreciate what you just said, Dominic. You haven't seen any stress within the portfolio. But is that a timing issue? Or in your slide 15, you're showing how interest rates yields have gone up on these loan portfolios. Is it a timing issue or do you feel good about the loan book and your ability of these borrowers to absorb where if the Fed funds were to peak out at 5%, they should be able to handle this where it doesn't become a credit issue for East-West? Do you feel good about that? Do you have visibility into that?
spk12: Well, when you say timing issue, when we do our stress tests on these real estates, we're obviously projecting. So it's not something that we just looking at it as of today, whether they can handle and so forth. So from that perspective, we feel pretty good about the liquidity level of our clients, you know, in terms of the cash flow that they've been getting from the existing business. So I guess in a way that what we notice is that the cash flow, it's still pretty good. I think it's really coming back down to the economy. The economy is still strong. Now, if you look at it, we project a much more deteriorating economy that will be very different. At this point, we don't see it. Things are going pretty well.
spk07: Got it. And I guess just separately in terms of loan growth, so appreciate the lower growth guidance, but just talk to us in terms of what are the pockets? I know Irene mentioned you expect loan growth across categories, but Any particular verticals, any markets where you're seeing more strength and more market share opportunities as we think about growth and maybe potential for upside surprise on that growth?
spk12: I think overall, we have always been very focused in having a more diversified growth. So from that standpoint, there's always going to be one particular industry vertical here and there. that seems to do a bit better than the others. However, overall, if it get too far, we rein it in anyway. So in that standpoint, that's why you always see a much more even kill, more diverse type of loan portfolio that we have here is because we actually manage it. So, but I would say that, I mean, at just Looking at maybe a couple of weeks so far, we do have a few more private equity, capital call line commitments that we have originated. But I would expect that if it continues to go in that direction, we probably have a stronger PE loan growth. And then also last year, we actually have surprisingly, you know, pretty decent growth from our greater China region. And so despite the pandemic, and so we expected that, you know, they may be able to continue to do quite well. Now, obviously they have a much smaller balance sheet, you know, but as a percentage growth, they're doing pretty well. So we may have a few other different areas that we'll be able to step up, you know, because we also have a, very strong competitive teams within the organization. Everybody wanted to do better. So we just expect that different team will step up in different quarter.
spk08: The next question comes from Brandon King with Truist Securities. Please go ahead.
spk05: Hey, good morning.
spk12: Good morning.
spk05: Hey, so I wanted to kind of Touch again on the NII guide and, in particular, your outlook for the trajectory and the interest margin. It appears if the margin stays flat from 4Q levels, you could potentially hit the guidance just from that.
spk06: But I'm curious what your assumptions are as far as the trajectory in them going through the year and also with the forward rate curve assumptions.
spk09: Yeah, you know, I think at this point my focus is really more on the NII, Brandon. We do expect, when we look at our guidance, if you can tell, you can do the math on our guidance as well, that we do expect the NII to grow from the fourth quarter level. Then it depends really more about the fluctuation of what happens per quarter. But both we expect to be positive in 2023. Okay.
spk05: And then in regards to your outlook for deposit growth, what areas or what categories of deposits do you see most of that growth coming from? And could you talk more about your ability to kind of mitigate losses in DDA?
spk09: Yeah, great question. When we look at our deposit portfolio and our customers, one of the things that we benefit from is just the diversity of customers we have. Certainly, in order to quite candidly remain competitive, we had these deposit CD campaigns in the fourth quarter, and we have one right now priced below market, but attractive enough rate, and also six-month duration. We don't want that to go too long. And so that is something that we continue to do. Relative to other kind of funding costs right now, we think it's attractive. It's also a customer base that stays with us and has a larger relationship with us. When we look for 2023 and where we think deposits are going to go, I'd say across the board. Although, realistically, in this kind of rate environment, it's hard to maintain the deposit balances in the DDA accounts at the level that we have pre-rising rates. We are still onboarding new customers all the time. Pipelines are strong on the deposit side. So we are very kind of positive about what we're doing. The investments that we've made in treasury management, cash management, product services, certainly are something that we're seeing a benefit today.
spk12: I wanted to highlight also, I think at the height of excess liquidity, which is during PPP time, you know, back in late 2020 because of COVID, we had like maybe... went all the way up to close to 43% as a percentage of DDA to the non-interest bearing deposit to the entire deposit portfolio, 43%. Today, we're down to 38%, so as you can see, there was a lot of liquidity then, but by By nature, even without interest rate rising and so forth, you expect that the de-success of liquidity would not be sustainable. So we are actually very, very pleased throughout the last few quarters watching our non-interest bearing deposit and see what the percentage stand. And it's kind of each quarter drop of one basis point and so forth. And then so far so good. So we dropped now to 38. It's still 38%. That's a lot of non-interest bearing deposits sitting there. And by the way, the other part is that we continue to bring in new customers. We continue to bring new commercial customers. We're still onboarding this new relationship one at a time. So in time, it will continue to grow the non-interest bearing deposit. It's just that there are some excess liquidity that in relationship what the market rate In terms of deposit, it is today. Naturally, there are people who are moving some of the maybe excess liquidity they put into whether money market accounts or maybe CDs account and so forth. So that's why you see that there is some gradual reduction on non-interest-bearing deposit balance. But in terms of number of accounts, it keeps going up.
spk08: The next question comes from Casey Hare with Jefferies. Please go ahead.
spk13: Yeah, thanks. Good morning, guys. Just wanted to follow up on the loan growth outlook. Was wondering what you guys were assuming for utilization rates in your guide and then any color on how loan pipelines are shaping up versus 930.
spk09: Yeah, at this point in time, we're not assuming a change in utilization rates, Casey. We're assuming flat from where we're at.
spk13: Okay, understood. And then on the credit quality side, you know, everything's still pretty benign and holding stable. I was wondering, is that true also for the $2 billion exposure in China, which obviously gets a lot of attention from investors?
spk12: China is even better. So we've always had a very, very strong, pristine loan portfolio. And so it's still exactly the same. So we feel that with the economy opening up, I think it was only going to help us better. While we don't expect that there will be some sudden surge of loan origination in 2023 because while the economy opened up, it's going to still take a little bit of time for the business to sort of get back on track. It will probably benefit us more in 2024 than 2023.
spk08: The next question comes from Gary Tenner with DA Davidson. Please go ahead.
spk04: Hi, good morning. This is Clark right on for Gary Tenner. I don't want to beat a dead horse, but just in terms of the loan growth again, are you expecting it to be front-end loaded or for a site across the quarters?
spk09: We're assuming that it isn't front-end loaded. That will be throughout, maybe a little bit more in the latter half of the year.
spk04: Got it. And the rest of my questions have been answered. Thank you, and great quarter.
spk08: Thank you. Thank you. The next question comes from Chris McGrady with KBW. Please go ahead.
spk03: Hey, good morning. Dominic, on capital, I think the dividend was a pretty strong signal given how much capital you have and the position you're in. Is that really the only capital return that you're contemplating right now given the economy? I know you've been resistant to the buyback, but just wanted to see if there's any change in tone there.
spk10: Chris, I just want to interject. We have not been resistant to the buyback. We bought back $100 million last year.
spk12: Yeah, we did. $100 million in the second quarter of 2022. We still have $254 million outstanding that we can execute anytime we want because it's been approved by the board last year. And, you know, we are very opportunistic in terms of the buyback. You have to look at it in the fourth quarter, we just racked up 25% return of tangible equity. Obviously, it's not one of those banks that really need to do this. However, we are always shareholders friendly. If we ever see that there's great opportunity, we absolutely will use the capital at the right moment. I thought what we did in the second quarter for the 100 million, was a great execution, because at that time, with that price, sure, I would jump right at it. But we have to also be mindful. One of the great advantages of East-West Bank, you look at our capital ratio today, in this very somewhat benign economic environment, and then because of the interest rate that we are doing extraordinary well from a return of equity and return of asset standpoint. However, had this been a completely different economic situation, had it been like a 6%, 7% unemployment rate, interest rate were in a much higher level, that business were having trouble, we, at that point, having this kind of capital would absolutely give our customers much stronger confidence about why they wanted to be banking with EastWest than the others. So I was always mindful of that. This has been doing really, really well for us back in 2008 and 2009 during global financial crisis. Somehow, somewhere, we just have a bit more capital than our peers. And so ultimately, customers just feel more comfortable with us. So we've always been very mindful of that. So that's one key reason. The other thing is that we don't want to not have some excess capital, just in case that there are even potential acquisition opportunity and so forth. So we are very choosy in terms of potential acquisition. However, if there is something available, we're always ready to execute. So all of that is a combination of multiple factors that cause us to be where we are today, but one way or the other, we are very comfortable where we are, and if ever, in a situation that we feel that the stock price or whatever the other reason that we feel, or maybe somehow there's not enough of a confidence of growth that we may want to do some buyback, we absolutely will step in. We'll do the right thing. So you can count on that.
spk03: Yeah, thank you for the perspective. Thanks, Eleanor. I do want to ask the tax rate. I'm not the... the tax expert, but I want to make sure I understand the cadence of the amortization. So Irene, you said roughly 95% of the 150 will flow through the M line. So that's like a little over 140. And I think the Q1 is a little over 20. Can you help us with the tax rate? Because it looks like amortization last year was a decent amount lower and the tax rate was 20. So I'm coming to a tax rate kind of mid to upper teens. Based on this guidance, I just want to make sure I don't make a mistake. Thank you.
spk01: Hi, Chris. This is Juliana. In terms of the tax rate, it will vary depending on your assumptions for pre-tax income, which will vary with your assumptions for provision for credit costs, obviously. In terms of the tax amortization, on the full year basis, when you look at that $150 million of tax credits, think of it as 95% of that will go into the tax credit amortization. However, we booked amortization when the credits close and go into service. Therefore, for what's on the docket for the first quarter, that's $22 million. That means the amortization rate in quarters two, three, and four will be higher in order to come up into that full year 95% number as credits close and go into service. So we wrote in the slide deck that for the first quarter, $92 million of tax credits will be in the tax rate calculation, and that will go on up through the year. And I can follow up with you offline for a more detailed calculation if you like.
spk08: The next question comes from Jared Shaw with Wells Fargo. Please go ahead.
spk02: Hey, good morning. Thank you. Good morning, Jared. You know, I guess when you look at the moves you've made with swaps and callers and the potential to add more, is your goal to get, you know, to sort of eliminate all that asset sensitivity earlier or much of that asset sensitivity earlier? in 23, or how should we be thinking about just your general asset sensitivity positioning over the first few quarters?
spk09: Yeah, great question. You know, I would say that that isn't our goal, Jared, to remove our asset sensitivity. What we want to make sure is that when we look at the balance sheet and the loan portfolio, that we are able to evaluate what we think might happen, hedge kind of risks that we see from interest rate perspective, but we still expect to be asset sensitive even with these changes that we're making.
spk02: Okay. And then my follow-up, any outlook on the fee income lines and what you're seeing in terms of potential for growth there among the different lines?
spk09: Yeah, great question. On the fee income, I would say that areas that are, if you break that down as far as things that are within our control, things that have to do with investments that we've made, growth that we see with our customers, you know, that's going great. Market kind of driven factors, things that maybe we don't have a control over, I think that's going to continue to be challenging, especially if you look at it from the perspective of mark-to-market on the derivatives and then also FX and that bounces around. But aside from that, we expect that from a core customer perspective and the growth perspective, we'll still see those increases.
spk08: The next question is a follow-up from Ibrahim Poonawalla with Bank of America. Please go ahead.
spk07: Thank you. I guess just wanted to follow up on China in terms of one, given the reopening that's underway in China, does that create maybe stronger growth opportunities as we think about this year? And how are you thinking about allocating more capital to that business? And I appreciate a lot of that business is kind of cross-border and cross-border connectivity, but would love to hear if there are increased growth opportunities emerging in China and And also, Dominic, would love to hear your views, as is now the chair of APEC, like how do you see that relationship evolving and creating more opportunity for the bank given its strategic positioning? Thank you.
spk12: In terms of the opening of China, it's not just like a sort of like a post-pandemic opening that the ability to travel, travel, in and out of China and so to help the foreign investments to do at ease about not having the restriction to do quarantine and so forth. That's actually a big factor because many of our management team have not been back to China for the last two or three years. And so I think that likewise, the same thing for many of the business around the world who are doing business in China, and they were restricted by that. And then with this opening up, I think that's a huge factor that helps substantially. That's one. The second part is really the Chinese government new policy towards business. Obviously, the last two or three years, the business sectors were having some hard time, whether you're in social media, high tech, video gaming, entertainment, real estate, education, you name it, every one of these sectors were hammered because of a much more challenging policy or regulation that came up that hindered their ability to grow. Now, just for the last few weeks, things turned in a completely different direction. Government are providing support to the real estate sectors They are also really getting much more business friendly to these other industries, et cetera. And so with that, we also see that foreign investments are getting their license approved and getting their, let's say, additional investment to get majority shares also sign off and so forth. So we do see that at this stage, the business opportunity is much better. Now, then reflected on the East-West Bank, we have always traditionally been mainly focusing on cross-border business. And so I think that with this additional opening up and the more business-friendly kind of policies, clearly it would encourage cross-border business. Please keep in mind that despite the from the U.S. side that we can see that maybe the attitude towards China has not improved. But on the other hand, we ought to keep in mind is that the business that's been restricted are usually related to national security issues, the highly sensitive or maybe some very, very high level technology or biotech type of business that quite frankly that East-West really do not have anything to do with. And our focus is on these very, very common electronics, garments, and business items that import, export, or investment to both shores, to the consumer market, and et cetera, that are not related to national security issue. So we do feel that there are plenty of room to grow, Even during the pandemic, when China literally was shut down by the border, we still find a way to grow our loans. We still bring in additional new customers. So we expect that to continue to grow. But I don't think that EastWest will be an organization that just because of this new opening, that we would just rapidly trying to push a lot of capital in there. And we're going to continue to stay steady. and we'll continue to be observing the market and make sure we make the wise choice. But I expect that in terms of a sustainable growth opportunity in the greater China region and also particularly, as you mentioned, throughout Asia, we feel pretty confident that that will be something that we expect a good opportunity going forward because the Chinese business also have expanded. into Southeast Asia, what is it, Vietnam, Thailand, Indonesia, Malaysia, et cetera. So we expected that many of our customers will continue to migrate their business into those regions, which will be beneficial to us. And that's also the reason why we opened a rep office in Singapore. So we will continue to evolve and expand into Asia and to make sure that we can effectively grow this business model as the bridge between the East and the West.
spk07: That is helpful. Thank you so much.
spk12: Thank you.
spk08: This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.
spk12: Well, I just want to thank you all for joining us. for the call today and we feel really good about where we are today in 2023 and we'll continue to march forward and looking forward to the call with you all in April. Thank you.
spk08: The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.

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