East West Bancorp Inc., parent company of East West Bank, is gradually getting the attention of Wall Street. As the San Marino-based commercial bank has reported quarter after quarter of strong earnings growth, its stock price has picked up steam and has handsomely outperformed its peer group.
Since July 1999, East West's share price has risen 62.1 percent, closing at $16.31 on Aug. 1, up from about $10 a year ago. The Russell 2000 Financial Services Index, meanwhile, dropped 8.9 percent in value over this period, as small-cap stocks in general and banks in particular failed to stir up much excitement on the market.
For the second quarter ended June 30, the bank reported net income of $8.4 million (39 cents per share), compared to $7.1 million (32 cents) for the like year-earlier quarter. That represents an 18 percent increase and puts the company on track to meet its projected 20 percent growth in earnings per share for 2000.
"Strategically, we're at the right place at the right time and we have the management team to take advantage of this situation," said Dominic Ng, East West's chairman and chief executive. "We continue to see strong growth from our retail banking services for the Chinese-American community, as well as from our mainstream banking services for small and mid-sized local businesses, and our international banking services."
Traditionally, East West Bank has catered to the Chinese-American community in the San Gabriel Valley. By providing bilingual banking services for the many immigrants in that area, the bank has formed a strong grip on this fast-growing and increasingly affluent market niche. More recently, the bank has been diversifying to take advantage of the departure of the large banks that used to be headquartered in Los Angeles and serviced local businesses, Ng said.
In addition, the continuing growth of international trade, in particular with Asia, has made East West one of the premier banks in the region for businesses that require international banking services. The bank has strong ties with financial institutions in Asia.
These growth factors, combined with East West's prudent lending habits, have made the bank a favorite with the few industry analysts who follow the stock.
"They are a premium bank and they are delivering on all fronts," said Derick Derman, an analyst with Wedbush Morgan Securities who rates East West shares a "strong buy" and has a 12-month target price of $19. "They are delivering in terms of earnings growth, asset growth, increasing their net interest margins they've got their engine humming."
In spite of such ringing endorsements and the last year's stock gains, East West's shares still have a price/earnings ratio of a paltry 11.32, compared to an average P/E ratio of 21.69 for the regional banking sector as a whole.
Part of the explanation for the lack of investor interest, according to Derman, is the unorthodox way in which East West became a publicly traded company.
Originally a privately held company, East West went up for sale when its original owners, an Indonesian family, were hit by the Asian financial crisis in 1998. To raise money quickly, the company went through a management buyout, whereby Ng raised $238 million from over 150 institutional investors to take over the bank.
However, in order to provide these investors with the necessary liquidity, the bank converted their ownership shares into stock by registering with the Securities and Exchange Commission and listing the shares on the Nasdaq in February 1999. In essence, East West went public without going through an IPO.
"When the stock started trading, it was already fully subscribed," Ng said. "We didn't need to raise money by selling a portion of the shares on the public market, and so we didn't attract the attention of retail brokers and researchers who would otherwise recommend the stock."
As a result, East West shares stayed pretty much an unknown quantity until quite recently, when the bank's solid results started to create some awareness.
"They've been beating or meeting expectations continually," Derman said. "And management has become more proactive in making the markets pay attention to them."
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