East West Bank fattens capital base in bid to outlast rivals
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East West Bancorp has been trying to convince Wall Street that it will be a sure survivor of the California real estate crash -- and a good bet to take business from weaker rivals.
Chief Executive Dominic Ng’s strategy: quickly raise the Pasadena bank’s capital cushion to levels that Ng believes will both buttress the lender against further credit losses and provide money for new lending.
On Tuesday, the parent of East West Bank said it sold 11 million new shares to investors, raising $66 million in fresh capital. Ng said the bank could have sold much more, based on demand, but wanted to limit dilution to current shareholders. East West was able to price the deal at $6.35 a share, a relatively modest 5.5% below the stock’s closing price Monday of $6.72.
By contrast, the median discount demanded by investors in new share sales by small- and mid-sized banks this year has been 7.9%, according to a tally by research firm Keefe Bruyette & Woods. Some banks have had to discount new shares by 20% or more to get investors to bite.
The stock sale was East West’s third move this month to raise its base capital level. The firm boosted so-called tangible common equity by $90 million on July 1 by converting some preferred shares to common. It added $27.5 million more in capital last week by selling five million new shares at $5.50 each to two private investors.
East West, with $12.7 billion in assets, now has tangible common equity totaling 6.9% of tangible assets, a ‘competitive and comfortable level,’ said Julianna Balicka, an analyst at Keefe Bruyette.
Still, she expects the bank to continue losing money in the second half as it copes with rising loan losses. She estimates East West will lose $2.75 a share for the full year.
Ng said he would use the additional capital in part to support an ongoing campaign to identify and deal with troubled loans early, essentially writing off bad credits before they worsen. He said that effort, which began with an examination of the bank’s loans to the troubled construction sector, had helped to produce second-quarter declines of more than 30% in the total of East West loans that have gone delinquent or have stopped paying altogether.
The new capital also will support more lending, Ng said. He said he sees opportunities to lend to stronger firms in industries that are under stress and consolidating, such as seafood imports, and to green industries such as solar panels and electric vehicles that potentially have huge markets in Southern California.
The bank’s hunt for new loan customers is one reason why Ng said he’s in no hurry to repay the $306.5 million in government capital that East West received last December as part of the Treasury’s program to boost the banking sector. The program was aimed at spurring new lending across the economy.
When the bank’s profitability returns, its stock price rebounds (the shares are down 58% this year) and unemployment drops in California, ‘That will be the perfect time to pay back the government,’ Ng said.
Another Southland bank, CVB Financial of Ontario, is taking a different tack. CVB, the parent of Citizens Business Bank, raised $115 million selling new shares Tuesday at $5.85 each. The firm said it planned to use most of the money to repay the Treasury capital it got in December.
-- E. Scott Reckard and Tom Petruno