August 10, 2014

EW nets P1.0b in 1H14

EastWest Bank (EW, Buy) disclosed to the Exchange that its net income for 1H14 reached P1b, 18% lower YoY. The bank grew its net interest income and service fees by 22.7% (to P4.8b) and 26.2% (to P1.5b), respectively. However, the bank’s earnings were dragged by substantially lower trading gains this year and higher taxes.

The bank’s loan portfolio increased by 29.1% (P106b), with both consumer and corporate loans growing 30.9% and 27.6%, respectively. Meanwhile, total deposits grew 24.3% (P126b), with CASA growing faster on the back of the bank’s expanded branch network. Total operating expenses, including provisions for losses, were relatively flat YoY at P5.9b.

The bank’s capital adequacy ratio (CAR) was at 11.7% and tier 1 ratio ended at 10.9% for end-2Q14. The bank said that it expects its capital ratios to improve once in the 3Q14 when the P5b Basel 3 tier 2 notes that it issued in July are included in CAR computations. Further, the bank plans to issue about P5b in preferred shares which will qualify as additional tier 1 capital under Basel 3.

Our take: EW’s results accounted for only 41.5% of full-year consensus estimates. Aside from the slower trading gains this year, the elevated levels of operating expenses and provisioning continued to dampen the bank’s results.

Note that the bank’s operating expenses remained high as it continued to feel the impact of the 178 new branches that it opened in 2012 and 2013, as well as the 39 new branches that it opened in 2014. These efforts, however, have allowed the bank to bring its consolidated branch network to 386. Aside from this, the bank continued to maintain a high level of provisioning, commensurate to the growth of its credit card business.

We expect the bank’s operating expenses and efficiency metrics to start normalizing next year, as the new branches start to earn and become less of a drag to the bank’s earnings. Further, the bank’s increased size and system improvements should allow it to reap scale benefits within the next two years. – WealthSec