Strong Results Ease Some Worries About East West Bancorp, But Valuation Is Still Appealing

With meaningful exposure to China and worries not only about the long-term health of the U.S.-China trade relations, but also concerns about asset sensitivity and credit quality, the wall of worry has been higher of late for East West Bancorp (EWBC), leading to pronounced underperformance over the past year. Strong fourth-quarter results should help ease some of those fears, but credit costs will be an ongoing concern in 2020.

East West Bancorp is a riskier-than-average bank investment idea, and I use a higher discount rate as a result. Even with that higher discount, though, I think the market is undervaluing what I see as mid-single-digit core earnings growth prospects over the next decade, not to mention opportunities to return more capital to shareholders and/or acquire within its existing footprint.

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Strong Results Ease Some Worries About East West Bancorp, But Valuation Is Still Appealing

Self-Improvement And Growth Initiatives Making A Difference For Umpqua

Umpqua’s (UMPQ) management change at the start of 2017 has made a difference for this West Coast bank, as the company has moved fairly aggressively to address two of my biggest concerns in late 2016 – a high level of expenses and a lack of clear growth drivers. A new focus on “upper-middle-market” lending should drive profitable C&I lending growth, while Umpqua Next Gen could result in some meaningful expense (a mid-single-digit percentage of 2017 expenses).

Since my last update, Umpqua shares have done a little better than the regional averages and better than peers/rivals like Washington Federal (WAFD) and PacWest (PACW), though not as well as SVB (SIVB) or East West (EWBC). At this point, I believe Umpqua shares are a little undervalued, provided an expectation of double-digit long-term core earnings growth is reasonable.

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Self-Improvement And Growth Initiatives Making A Difference For Umpqua

Umpqua Seems Short Of Growth Drivers

Oregon's Umpqua (NASDAQ:UMPQ) is something of a case-in-point as to why I'm reluctant to overpay for stocks (and bank stocks in particular). When I last wrote about this high-quality bank back in 2014, I thought the shares looked expensive. Since that time, the shares are actually down about 5% - rare for most bank stocks and all the worse when compared to the performances of regional rivals like East West (NASDAQ:EWBC), Washington Federal (NASDAQ:WAFD) and Pacific Continental (NASDAQ:PCBK).

What's worse is that even after this run of underperformance, the shares still don't look all that cheap. Not only is Umpqua not all that asset-sensitive, it also lacks real leverage in more than a handful of major markets. Add in a loan book that is overweighted to commercial real estate and multi-family residential lending, an elevated cost structure (which is liable to be tough to tame) and weakening yields, and it's a tough near-term outlook. While there is definitely room for improvement, Umpqua may find it hard to go much above 10% ROE in the foreseeable future, and that limits the value proposition today.

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Umpqua Seems Short Of Growth Drivers