China: The Future for East West Bancorp

East West Bancorp (EWBC) is the holding company for East West Bank, which operates more than 60 branches in and around Los Angeles and the San Francisco Bay area, plus one each in Houston and Beijing. The bank offers individual and business loans; checking, savings, money market, and NOW accounts; CDs; IRAs; insurance; and credit card merchant services. It primarily serves the Chinese-American community; most customers are engaged in business in the Asia/Pacific Rim region. It offers multilingual service in English, Cantonese, Mandarin, Vietnamese, and Spanish.

While the focus in the past was on Chinese Americans, the new thrust for business is China. That one branch in Beijing is just the first with another in Hong Kong being planned. Just recently authorities gave the bank approval to open another branch in Shanghai. Look east, young man, look east. That's where the future for this bank lies.

As Chinese and American exports and imports increase daily, financing these transactions can only grow. That means letters of transit, credit facilities as well as individual businesses borrowing to finance inventories, shipping, expansion. This bank is in a good position to prosper from Chinese economic growth.

Here's how the bank grew in the last 5 years: revenues, on average, gained 21% a year while earnings, on average, increased 27%. In the next 5, look for 14.5% annual growth, on average, for sales and earnings to increase by 20% a year, on average. Return on equity was between 14.8% and 16.1% in the last 5 years. Expect 14% this year and 13% next year, most likely from new equity issuance as the bank finances its growth and meets capital requirements all banks have.

East West has been a busy buyer of other banks. In the last 8 years, it bought 7 of them, including United National Bank in 2005 and Standard Bank in 2006, each with more than $900 million in assets. The balance sheet is strong enough to handle these acquisitions with plenty to spare for a new dividend rate, a doubling to 10 cents a share per quarter.

EWBC is an interesting play on one of the hottest sectors in the market and answers the question of how does an individual participate in the great Chinese economy. While it doesn't have a large presence in China now, it's working on building one with a strong base in the U.S.. As its customers become more active in China, they will need more money to expand their businesses. That's where East West Bank can help.

EWBC 1-yr chart

Disclosure: Author has no position in EWBC.