East West Bancorp Inc (EWBC) Q4 2018 Earnings Conference Call Transcript

EWBC earnings call for the period ending December 31, 2018.

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Motley Fool Transcribers
Jan 24, 2019 at 5:30PM
Financials

East West Bancorp Inc  (NASDAQ:EWBC)

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Q4 2018 Earnings Conference Call
Jan. 24, 2019, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, and welcome to the East West Bancorp's Fourth Quarter and Full Year 2018 Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Julianna Balicka -- Director of Strategy and Corporate Development

Thank you, Alison. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the fourth quarter of 2018. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call management may make projections or other forward-looking statements regarding events or future financial performance of the Company within the meaning of the safe harbor provision of the State (ph) Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the Company's operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31st, 2017.

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website.

I will now turn the call over to Dominic.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Julianna. Good morning, and thank you, everyone, for joining us for our fourth quarter 2018 earnings call. I will begin our discussion with a summary of results on slide three.

This morning we reported full year 2018 net income of $704 million or $4.81 per share, marking the ninth consecutive year that East West has achieved record earnings. Full year net income and diluted earnings per share both grew by 39% from 2017.

Our record earnings in 2018 were driven by robust year-over-year loan growth, strong net interest income growth and expanding net interest margin, controlled expense growth and stable asset quality. This was achievable because of the diligent efforts of our 3,150 associates, and I would like to thank every one of them for contributing to the success of the Company.

For the fourth quarter of 2018, we reported net earnings of $173 million or $1.18 per share, up 104% year-over-year from $85 million or $0.58 per share and up from last quarter's earnings of $171 million or $1.17 per share. Quarter-over-quarter, our net interest income grew by 6%, reaching a record $369 million in the fourth quarter and our net interest margin expanded to 3.79% for the fourth quarter. Our nonperforming assets decreased to $93 million or just 0.23% of total assets as of December 31st, 2018, and quarterly net charge-offs were 20 basis point of average loans, similar to the year-ago quarter.

Now turning to slide four. You can see that our fourth quarter return on assets was 1.69%; return of equity was 15.8%; and return on tangible equity was 18%. Our profitability ratios are consistently attractive. Our five-quarter range for operating ROA has been 1.35% to 1.84%; for ROE has been 13% to 17%; and tangible ROE has been 15.1% to 19.7%.

Looking toward 2019 and beyond, I am excited about the opportunity for East West to win new business and deepen our existing client relationships. With our presence in the United States and Greater China, we have built cross-border banking expertise that differentiates us from other banks. Despite the decline in Chinese exports and Chinese direct investment to the United States, at East West, we're actively assisting our current and prospective clients and finding opportunities for growth. Our bankers help our clients navigate the evolving geopolitical environment by providing them with expert up-to-date knowledge and understanding essential to conducting business in both markets and matching East West products and services to meet each client's unique cross-border needs.

Although some of our wholesale trade clients have scaled back their activities, on the other hand, others are taking advantage of the disruption to gain market share. Overall, our wholesale trade portfolio is up 7% year-over-year. The paths to cross-border success for East West are multifaceted, and we are comfortable that our differentiating position will serve us well in supporting the continued profitable growth of our well-diversified business.

Our outlook for 2019 is positive and we continue to invest in our business. In 2018, we invested in enhancing our cross-border team and capabilities and in upgrading our cash management platform. And in 2019, we will continue to make investments in technology to improve our fee-based income capabilities, particularly in foreign exchange and cross-border payments. And, as we have mentioned previously, another ongoing initiative is building a digital consumer banking platform tailored to the needs of our consumer client base.

Now moving on to a discussion on this quarter's loan and deposit growth on slide number five and slide number six. As of December 31st, 2018, total loans reached a record $32.4 billion, growing by $1.2 billion, up 15% linked quarter annualized from September 30, 2018, and growing by 11% year-over-year. In the fourth quarter, average loans of $31.5 billion grew by 13% linked quarter annualized.

Loan growth in the fourth quarter was broad-based across our lending portfolio. Our strongest quarter-over-quarter growth in average balances was in commercial and industrial loans, which were up by $427 million or 15% annualized, followed by single-family mortgage, which were up by $359 million or 26% annualized. Our CRE loans increased by $295 million or 10% annualized. Within our commercial lending this quarter, we saw strong performance in our private equity and entertainment portfolios.

On slide six you can see that total deposits grew to a record $35.4 billion as of December 31st, 2018, an increase of $1.8 billion or 21% annualized from September 30, 2018, and up by $3.2 billion or 10% year-over-year. Our fourth quarter average deposit of $35 billion also grew by 21% linked quarter annualized. By category, on an average basis, quarter-over-quarter growth was led by DDA, up by $808 million or 30% annualized, followed by money market accounts, up by $567 million or 30% annualized and certificate of deposits, up by $506 million or 24% annualized. We tend to experience seasonally strong demand deposit growth in the fourth quarter and anticipate slow growth rate in the first half of the year.

And now I will turn the call over to Irene for a more detailed discussion of our income statement and outlook.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Thank you, Dominic.

On page seven, we have a slide that shows the summary income statement, a snapshot of the key items including tax-related items. I'll skip the summary and dive right into the details on slide eight.

Fourth quarter net interest income of $367 million (ph) increased by 6% linked quarter, driven by a combination of expanding loan yields, average loan growth and an increase in interest bearing cash and cash equivalents, partially offset by the increased deposit expense. It was a record quarter of net interest income for East West. Year-over-year, our net interest income grew by 16%.

GAAP net interest margin of 3.79% increased by 3 basis points quarter-over-quarter and 22 basis points year-over-year, and, excluding the impact of accretion, adjusted net interest margin of 3.73% was up by 1 basis point from the previous quarter and up by 24 basis points year-over-year.

We had an adjustment to amortization of certain IO strips, which decreased interest income by $1.4 million in the quarter and decreased NIM by 1 basis point. Without this item, our fourth quarter GAAP NIM would have been 3.80% and the adjusted NIM would have been 3.74%. Excluding that item, the drivers of the 3 basis point expansion to the GAAP margin for the fourth quarter are as follows: a 15 basis point increase stemming from higher loan yields, which reflected upward repricing of existing loans as well as higher yields on new loans across our portfolios; a 2 basis point increase due to ASC 310-30 discount accretion income; a 1 basis point increase from higher yields on other earning assets, partially offset by a 12 basis point decrease from higher rates paid on deposits.

In addition, balance sheet mix change decreased the NIM by 3 basis points. Loan growth was more back-end loaded in the fourth quarter whereas deposit growth was evenly distributed throughout the quarter, which accounted for the elevated average quarterly balances in the lower yielding interest bearing cash and cash equivalents. I would like to point out, this additional liquidity is also the main driver of variance to NIM relative to our expectations as of the end of last quarter. We had initially anticipated a fourth quarter decline in cash and cash equivalents and thus more NIM expansion, but strong deposit growth, including seasonal growth of demand deposits came in above our expectations.

For 2019, we expect a modestly expanding net interest margin for the full year, even with the current expectation for no increases to the prime rate. As of December 31st, the end of period cost of our total deposits was 95 basis points compared to 83 basis points as of September 30th and end of period cost of our interest bearing deposits was 1.4% compared to 1.22% as of September 30th.

Cycle-to-date, since the Federal Reserve started increasing Fed funds rate in December 2015, we have had an implied beta of 56% on our loan yields, excluding ASC 310-30 accretion, and 30% on our total deposit costs, again, relative to the change in the average Fed funds rate. Our implied loan beta in the fourth quarter of 2018 was 61%, up from 55% in the third quarter and our implied total deposit cost beta was 45% in the fourth quarter, down from 66% in the third quarter.

Now turning to slide nine. Total noninterest income in the fourth quarter was $42 million compared to $46.5 million in the prior quarter. Excluding the impact from all gains on sales, total fourth quarter noninterest income was $39 million compared to $42 million in the prior quarter. Customer driven income in the fourth quarter was $37 million, essentially flat from the prior quarter. Quarter-over-quarter, letter of credit fees and FX income increased, reflecting a greater volume of customer driven FX transactions, partially offset by mark-to-market revaluations for foreign currency balance -- balance sheet items. Quarter-over-quarter, derivative fees decreased due to a decrease in the fair value of interest rate swaps as well as a lower volume of customer transactions.

Moving on to slide 10. Fourth quarter noninterest expense was $188 million and our adjusted noninterest expense, excluding amortization of tax credit investments and core deposit intangibles, was $156 million, a slight decrease from $158 million in the third quarter.

Our fourth quarter adjusted efficiency ratio improved to 37.9% compared to 39.9% in the third quarter as our revenue growth outpaced expense growth, generating positive operating leverage. Over the past five quarters, our adjusted efficiency ratio has ranged from 41.6% down to 39 -- 37.9%, excuse me, in the fourth quarter.

Our fourth quarter 2018 pre-tax pre-provision income of $255 million grew by 7% quarter-over-quarter and our fourth quarter pre-tax pre-provision profitability ratio of 2.5% was up by 6 basis points from the third quarter. Year-over-year, our pre-tax pre-provision income is up by 20% and pre-tax pre-provision profitability has expanded by 23 basis points.

In slide 11 of the presentation, we detail our critical asset quality metrics. Our allowance for loan losses totaled $311 million as of December 31st, 2018, or 96 basis points of loans held for investment, down slightly from 99 basis points as of both September 30th, 2018, and December 31st, 2017. Nonperforming assets of $93 million as of December 31st decreased by $22 million or 19% from $115 million as of September 30th and were equivalent to 23 basis points of total assets as of December 31st, 2018, compared to 29 basis points as of the end of the third quarter and 31 basis points at the end of last year -- at the end of the previous year.

For the full year of 2018, our net charge-offs were $40 million or 13 basis points of average loans and we've recorded a provision of credit losses of $64 million. This compares to net charge-offs of $23 million or 8 basis points of average loans and a provision for credit losses of $46 million in the full year of 2017. We continue to provision in excess of charge-offs to support our strong pace of loan originations. For the fourth quarter of 2018, net charge-offs were $16 million or 20 basis points of average loans annualized, and the provision for credit losses recorded was $18 million.

Moving to capital ratios on slide 12. East West capital ratios remained strong. Tangible equity per share of $27.15 as of December 31st grew 5% linked-quarter and grew by 17% year-over-year. Our regulatory capital ratios increased by 67 basis points to 77 basis points year-over-year. We believe that organic balance sheet growth, followed by measured common dividend increases is the best use of our capital at this time, given our strong outlook for the near to medium term.

As noted by Dominic and announced in our earnings release earlier today, East West Board of Directors has declared first quarter 2019 dividend for the common stock. The common stock cash dividend of 23 basis points (ph) per share is payable on February 15th, 2019, to stockholders of record on February 4th, 2019.

And with that, I'll move on to reviewing our 2019 outlook on slide 13. For the full year of 2019 compared to our full year 2018 results, we expect end of period loans to increase by approximately 10%, diversified across the key categories of C&I, commercial real estate and single-family. We anticipate deposit growth will support the loan growth in 2019. We expect our 2019 net interest income, excluding ASC 310-30 discount accretion, to grow at a low double digit percentage rate. Please note, this is a new item we have added to our published outlook.

We expect our adjusted net interest margin, excluding the impact of ASC 310-30 discount accretion, to range between 3.75% and 3.80%. Our outlook incorporates no additional Fed funds rate increases in 2019. And with that, we still expect an expanding NIM in 2019 relative to full year 2018 and the fourth quarter margin as well. The impact of ASC 310-30 is continued to trend down and we expect accretion income to add just 2 basis points to the reported GAAP net interest margin in 2019.

We expect non-interest expense, excluding tax credit amortization and core deposit premium amortization, to increase at a mid single digit rate. Given our current view of revenue growth, this does imply a modest positive operating leverage in our full year efficiency ratio for 2019 compared to 40% in 2018. We project that the provision for credit losses will range between $80 million and $90 million. The expected year-over-year increase in the provision expense reflects loan growth as we otherwise expect that the asset quality backdrop in 2019 to be broadly similar to what we have experienced in 2018.

Finally, we anticipate that the effective tax rate will be 15% for 2019 as we expect to continue to invest in tax credit investments, which reduce our tax liability from the statutory rate. We anticipate tax credit investments to be at similar levels to 2018.

With that, I will now turn the call back to Dominic for closing remarks.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Irene.

In closing, we had a solid fourth quarter to finish 2018. We are looking forward to another year of strong financial performance in 2019.

And with that, I would now open the call to questions. Operator?


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Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) Our first question today will come from Jared Shaw of Wells Fargo. Please go ahead.

Jared Shaw -- Wells Fargo -- Analyst

Hi, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Jared.

Jared Shaw -- Wells Fargo -- Analyst

Maybe if we can start with the loan guidance outlook, the 10% number is less than what we saw this year. I guess what would have to happen to -- to see loan growth come in at a higher level? Would it be an actual increase in the economic activity or are you expecting some type of a -- maybe a broader economic slowdown when you look at that 10% number?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, we did 11% last year. So this, we are projecting 10% in terms of volume of business probably walked out about more or less the same. So we did not particularly looking at any sort of slowdown or anything like that at all. I think what we see is that we have a very diversified loan portfolio, and we see growth from our single-family mortgages; we see growth from those commercial real estate; we also see growth in C&I, and particularly in C&I -- within C&I we have a very diversified portfolio. So growth come from different places and in different quarters -- like -- a good example will be the fourth quarter. Private equity capital call line and entertainment portfolio risen up and if you recall, in the third quarter, our energy business, oil and gas business had gone up. So we just -- from different areas and different quarters they step up. I think that -- in the way that all of them are actually making pretty positive organic growth consistently. I mean, sometimes different performance per quarters has to do with payoffs because various industries or various borrowers have different needs and so forth and that payoff cause some of these to varies. But all in all, I say that at this point right now, we are comfortable with our guidance. Is it likely that we can do more? We're always trying to do more. And then so my view is that at this stage we feel pretty good with 10%, and we're going to try to do our best to outdo that guidance if possible. And if the economic situation get better, we do -- we obviously will update our guidance later on down the road.

Jared Shaw -- Wells Fargo -- Analyst

Okay, thank you. And then maybe shifting to capital. You do have a strong capital position. With the outlook for 2019, that should stay strong. Would you consider supplementing capital management with a buyback or a special dividend beyond the traditional dividend here? Or, I guess, the back end of that question is where do you think a good capital ratio is for the Bank now in terms of an optimal capital ratio?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. As Dominic mentioned, we are projecting that we will continue to have a strong organic growth. And that is in our view the best use of our capital, and that's for shareholders. Certainly, if the capital ratios continue to grow, the environment -- it's more -- if we look at the environment and think that there are other alternatives for the capital for shareholders, that's something that we'll consider and then we have active dialog with the Board about, Jared.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. We constantly have discussion with our Board, and so we are very shareholders friendly. So that's why this topic is always at -- in discussion and -- but so far, we looked at with our very strong return of equity and we continue to be able to find new clients, grow our business organically. We are one of the few banks in the industry that are sort of not as suitable to go into this -- so buyback formula. So at this stage, that's what we are right now, and then -- but if that condition ever change at East West, obviously we're very logical and we will do what's right for our shareholders.

Operator

And our next question today will come from Dave Rochester of Deutsche Bank. Please go ahead.

David Rochester -- Deutsche Bank -- Analyst

Hi, good morning, guys.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Dave.

David Rochester -- Deutsche Bank -- Analyst

A couple on the NIM guide. What are you guys expecting for the impact from the December hike in this guidance and the liquidity build impact that you had this quarter? You're expecting that to run off or sort of remain here?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah, Dave. So we are expecting a increase in our interest income and in the NIM and our guidance for the full year 2019 does reflect that as far as the increase to Fed funds in December. Overall, we do not think that we'll have this same level of excess liquidity that we did for most of the fourth quarter and next year as well. So I would say if you look at the full year '18 as a more normalized rate for us as far as the liquidity and the amount of excess shorter-duration assets that we have versus exactly what happened in the fourth quarter, that may help you kind of model that out.

David Rochester -- Deutsche Bank -- Analyst

Okay. And then just a follow-up. As you guys think about ways to support the NIM over the next year, it looks like your securities yield is actually below your cash yield right now and sits at a negative spread versus some of your borrowings and maybe in some of your higher rate CDs. Have you guys thought about running some of that off and repaying borrowings completely and then maybe repositioning the rest? It seems like you have the capital to do that if you have to take some hits on that repositionings. Wanted to get some thoughts there.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah, we -- from time to time, we've looked at that and over the -- I think the last several years we had done some repositioning. I'll just kind of point out the fourth quarter security yields was negatively impacted by the additional amortization. So ex that we would have been at a 3 -- 2.35%. If we look at what we're buying right now, the yields are higher, closer probably to 2.6%. A little bit misleading with some of the cash -- some of that cash is in our Hong Kong subsidiary bank where the rates are higher. So that skews it a little bit as well. Maybe offline can give a little bit more of the detail on that for you. But certainly, we do anticipate being able to redeploy those securities in higher yielding assets. But overall, we're not taking too much duration risk on that portfolio and we are reinvesting in similar types of securities, agencies, Ginis (ph).

Operator

Our next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning, guys.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Ebrahim.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So I think just wanted to follow up on the NIM, on the other side of the balance sheet, where we've seen a fair amount of growth in time deposits and you've grown noninterest-bearing deposits as well. So I'm just trying to understand, as you think about the NIM, my sense is without any rate hikes we see another leg higher in first quarter and then just slower as new growth is put on. Is that the right way to think about how the trajectory of NIM in the absence of rate hikes? And if you can talk about just outlook on deposit growth from a mix standpoint, where do you -- do you expect continued sort of mix shift toward time deposits to continue?

Dominic Ng -- Chairman, President and Chief Executive Officer

I think for the time deposit, we would obviously because of the rate hikes. We've seen the customers now finally, many of our core retail customers now start finally paying attention to -- deposit interest rate does matter. So they are now -- many of them have converted. But still what we -- what you have noticed is that, have you seen in our fourth quarter numbers, we are not just growing CDs. In fact, we grew even more on money market accounts. And so we continue to have this discussion and dialog with our customers and sometimes you lock in a CD. It may not give them the flexibility, but more importantly, we are getting more and more commercial customers. So because of the nature of the commercial customers and the -- I mean, they do need flexibility so many of them are really not going to be into -- to go into CDs. So if you look at in 2019, I don't think that the conversion rate will be as high as what happened in 2018. I just think that many of them who are our core customers who converted from the regular checking accounts or maybe money and market accounts and CDs pretty much have done it, and we will bring in some new CD customers without a doubt in 2019 because every year we bring in new customers. But then I would say that the rate of conversion should be substantially less than 2018.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And just on a separate topic, Dominic. So you're very upbeat on loan growth last quarter and I think that supported in your guidance for 10% this year. Having said that, I think from an investor standpoint there remains concerns around China tariffs and let's assume the worst case with there's no deal, we get into another round of tariffs, where is the downside risk to growth? Is it in the mortgage growth slowing down? Is it commercial growth slowing down? Like how do -- or on the credit front? I know you've talked about this, but would love to get your updated thoughts here because I feel like it's weighed on the stock all year.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. What you can see, 2018, if you look at what should be listed up the top 10 news in any kind of media or magazine, the trade war will probably front and center at the top. And interesting enough, we -- while we presented the East West's exposure to tariffs two quarters in a row, but at the end of the day comes the end of the year, we actually grew our trade portfolio by 7% year-over-year. I think organization like East West always has a mindset that we are still, at our size, can be very nimble. And one key advantage we have is that we know the space, we know the business and we know how to navigate. And that's why while others may be shying away from the exposure, sometimes we're able to capitalize on these kind of like a perceived crisis situation to result in tangible opportunities for East West Bank. So I don't know what the final discussions is going to be like between US and China. At this stage it looks much more positive than last year, but you never know until it's all done. And when I say it's done, it's never going to be all done. Most likely there is going to be some sort of like general agreement, but then later on there may be some of the other issues that may popped up. My -- our position at East West is, we are watching the development on a day-to-day basis and making sure that as long as we stay knowledgeable we'll always find opportunities to capitalize on it. As you -- the other thing I want to mention as you -- as you highlight that is that single-family also CRE also C&I that may slow down due to these -- the US trade tariff dispute, again it's hard to tell. We thought that with the restriction of money coming from China two years ago, and that will be a much slower growth in our single-family mortgages area because we do have some of these clients from China and that actually back home in United States it was substantial down payments and gets a small mortgage from us. But as of 2018, we continue to have strong growth in our single-family mortgage and we also -- and so far has a pretty strong pipeline. And what we've seen is that, and our conclusion is that, besides just the new investors coming from China that are buying single-family homes here in the past, we are taking market share domestically from either Chinese-American citizens here or other non-Asian customers who find our services, the turnaround time, to be substantially better than the other peers, and for that reason now we're taking shares. So we will continue to also work on that to make sure 2019 that we execute, doing our job, so that we will be able to get more business than the year before. And that's pretty much our -- East West's strategy is that we execute and we focus, and that's about it to pretty much get the financial results what we just presented to you earlier. And in 2019, it's more or less the same. We got to execute and we need to focus, and that's pretty much about it.

Operator

Our next question will come from Chris McGratty of KBW. Please go ahead.

Christopher McGratty -- KBW -- Analyst

Great. Thanks for the question. Irene, the mid single digit expense guide obviously doesn't include rates. To the extent that we do get rate hikes in the year, number one, can you talk to the sensitivity of that perhaps going higher and also the sensitivity for each hike? Can you just remind us what the basis point dollar effect is -- for your net interest income is? Thanks.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Chris, I think you're referring to the -- our guidance where we say that we have mid single digit growth in operating expense. I don't know if the rate hike will really impact that significantly. Certainly, depending on the rate environment, production may be lower or higher and that will affect the compensation number. But overall, nothing substantial.

Christopher McGratty -- KBW -- Analyst

Okay. And then the sensitivity, can you remind us the basis point sensitivity to each 25 (ph)?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Are you referring to NIM?

Christopher McGratty -- KBW -- Analyst

That's right. Yeah.

Julianna Balicka -- Director of Strategy and Corporate Development

Chris, this is Julianna. In the fourth quarter, the sensitivity of the net interest margin to each rate hike that we saw, on average we are now at 7 basis point per 25 (ph) through the most part.

Christopher McGratty -- KBW -- Analyst

Thank you.

Operator

Our next question will come from Michael Young of SunTrust. Please go ahead.

Michael Young -- SunTrust -- Analyst

Hey, good morning. Wanted to get a little bit of color on just the fee income growth outlook. I know historically that's been tracking kind of closer to loan growth potentially in most categories but have been relatively flat the last couple of years. So just wanted to see any updated thoughts if that's mix shift in the type of loan growth or any change in customer demand, et cetera.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

I think relatively flat year-over-year is exactly where we're at as we compare to last year. If we look at the category, certainly there are areas where we've seen growth as you mentioned, related to the loan growth. Year-over-year, certain categories, for example, FX, fee income, last year we had a lot more volume of revenue related to customer transactions related to (inaudible) what would happen with the Chinese RMB currency. This year less so. So some of that market-driven. Same thing with the swaps, given kind of where our rates are and the flatness of the curve and expectations for the future. I think when we look at 2019, certainly in those areas from a commercial side, also from a consumer side wealth management, we feel there's a little bit of work to do and that we're optimistic we will be able to kind of have that growth in 2019 in all these categories.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. I think that, as I just said it earlier, execution and focus. We need better execution and focus in 2019. But I tell you, I feel pretty confident that can be better. I feel pretty good about talking to these team members in these categories and they all feel that 2019, they're relatively optimistic that we'll be able to do better.

Michael Young -- SunTrust -- Analyst

Okay. And just taking all that together, maybe if we get a low single-digit kind of growth in fees or something like that, high single digit or double digit net interest income growth and then the mid single digit expense growth, I mean, we should see pretty meaningful improvement in the efficiency ratio this year. Is that the outlook and anything that would cause that to kind of not come to fruition?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

I think I would categorize that improvement. I don't know about meaningful. Certainly, just with a positive operating leverage, we expect the kind of strong profitability. We do think that the efficiencies will increase -- improve -- Julianna is correcting me -- improve.

Operator

Our next question will come from Matthew Clark of Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Hi.

Matthew Clark -- Piper Jaffray -- Analyst

The mid single digit core expense -- the mid single digit core expense guide, I mean, should we think of that is 5% or 4% to 6% or 3% to 7%? Just curious how wide of a range you might be thinking about.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

We should think about as mid single digit.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. All right. Just, think I'm going to try. And then -- and then leveraged lending getting a lot of attention these days. Just wanted to get an update around your exposure there.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Sure. We have leveraged lending exposure that is about 6% our total C&I book, about 2% of our total loan book.

Operator

Our next question will come from Ken Zerbe of Morgan Stanley. Please go ahead.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Just wanted to be a little more specific in terms of the guidance. Speaking specifically on the deposit growth side, what are you assuming -- sorry, deposit side securities growth -- but what are you assuming for securities growth in 2019 as well?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. We -- We're not assuming a substantial increase in our securities portfolio at this point, Ken, for 2019.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Got it, OK. So whatever deposits you have or given the strong deposit growth presumably that stage constant and then it stays relatively, I guess, stable thereafter. Okay, and then just real quickly the second follow-up question I had, in terms of your deposit beta, it was good to see that was actually lower sequentially. Some of the banks that we talked to have said that they actually expect an acceleration or an increase in deposit costs in the first quarter. Is that also your expectation or what are you seeing in terms of the pace of deposit beta changes going into first quarter? Thanks.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah, that's a great question. We do anticipate, given kind of how we're modeling for 2019, that there will continue to be a rise in the deposit costs in the first quarter of 2019, maybe a little bit more as well in the second quarter, but at a modest pace relative to where we're at. And adding to that, we expect that the interest income from the loans and securities and growth from that will continue similar to the fourth quarter to be in excess of that. And also share -- I think when we look at the fourth quarter, the actual results versus what we had previously modeled, the cost of deposits actual came in at about 90 basis points. We had models maybe 2 basis points under that, 88 or so. So I wanted to share that with you so you understand kind of what we are -- we were thinking versus the actual.

Operator

Our next question will come from Lana Chan of BMO Capital Markets. Please go ahead.

Lana Chan -- BMO Capital Markets -- Analyst

Hi, good afternoon. Or good morning, to you guys.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good afternoon, Lana.

Lana Chan -- BMO Capital Markets -- Analyst

Yeah. Couple of questions. One is on your asset sensitivity as we get to sort of maybe toward the later ends of this tightening cycle. Any thoughts about potentially moderating your asset sensitivity with swaps or hedges or something else?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yes, that's a great question. Certainly, as we get, it looks like maybe the end of the rising rate kind of environment. Certainly the forward curve suggests that inversion shorter-term right now. Some of the things that we've done, and I'll share, are as far as with the C&I loans, putting back floors -- this is something we started late last year, below the fully kind of index rate, below the margin, just to make sure from a balance sheet perspective that we're protected if rates do decrease. Additionally, the use of hedges, collars, that is something that we're considering and have discussions that are (inaudible) we haven't as of yet, at the end of December, but certainly that is something that we will continue to evaluate as the year progresses.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. Thank you, Irene. And then just on the other side of that, on the deposit costs, we're entering Chinese New Year soon. I know you guys usually have special CDs around that. What are your plans for CD promotions?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, yeah, we always do CD promotion around Chinese New Years and so this year, again, we will do that. And we will offer some -- a nice -- gift item that relevant to this year's Chinese New Year theme and we think that this would do well. Now in terms of rate, we're actually offering rate that is lower than what we offered in the third quarter of last year.

Operator

Our next question will come from Aaron Deer of Sandler O'Neill and Partners. Please go ahead.

Aaron James Deer -- Sandler O'Neill and Partners -- Analyst

Hey, good morning. Most of my questions have been asked and answered. Just a question on -- you have discussed a little bit around improving some of your fee-based businesses, in particular wealth management. Any chance you'd be looking to do anything on the acquisition front there?

Dominic Ng -- Chairman, President and Chief Executive Officer

We -- at this point, again, because of very nice organic growth, we make -- it makes it difficult for us to find meaningful target. This is kind of like a little bit similar type of discussion we have with the Board. There is always this popular topic that is in the industry right now is an acquisition or stock buyback. Neither one of them work really well for us because if you -- as you've seen, you know that the relatively strong organic growth that we have in both loans and deposits, and then our view is that if we can do it organically, why deal with other peoples' problems. But there are obviously -- there are banks out there that will be interested to explore. But then you have to come back down to, is the price reasonable. And before we get into that, I think right now our focus -- we are focusing on our own execution and so far it's turning into some very, very good financial performance. And so from that standpoint, we try not to be distracted too much. So organization-wise, I will say that the whole -- the whole organization, all associates are pretty much focusing on the day-to-day execution. Irene and I do occasionally get distracted. I once in a while like to get distracted to look at somebody else's problem and see what potentially that's out there that is suitable for us. But at this stage right now, let's say that we don't see a lot of likelihood there will be some major deal that we will be announcing.

Aaron James Deer -- Sandler O'Neill and Partners -- Analyst

Okay. Thanks, Dominic.

Operator

Our next question will come from Gary Tenner of D.A. Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning. Just a couple of questions here. On your credit quality table, there was the addition of a -- other NPA item. Was that something that was in non-accrual previously or something that popped new in the quarter?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yes. That was something that was non-accrual before and what that line item is that we foreclosed on some film rights. There was no associated charge-off with that, and we do expect to be able to sell that in the near future at par or hopefully above.

Gary Tenner -- D.A. Davidson -- Analyst

Okay, great. And then just another question, just broadly on asset quality, with your guidance for provision in '19 on $80 million, $90 million range. But you know with sort of steady pace of loan growth next year, is there anything that you're seeing that's giving you sort of an outlook that you might want to increase the qualitative reserves? Is it the time -- is it the timing of where we are in the expansion cycle? Maybe just talk about the thoughts around that.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah, that's a great question. The qualitative reserves for East West continue to be a substantial component of our allowance, ranging 40 (ph) to -- 40 (ph) plus probably at the end of the year, December 31st. The qualitative reserve was 44% of the total allowance. So not insignificant, and we continue to evaluate as far as from macro factors, GDP growth, where the curves are, to see are there appropriate qualitative factors that we should add or adjust. When we look at the projections for 2019, certainly with the loan growth of 10%, we need to provide for that. The range that we're looking at, round numbers here, for PAS (ph) related loans is probably 50 to 100 basis points, depending on that. So in the last few years, we've continued to reserve somewhat around those levels, but we've also had the backdrop of a substantial reduction of substandard loans. At this point in time, substandard loans of total loans, I think it's under 1% as of December 31st. So to expect to continue to draw on that is not likely. So those are all the factors that we've looked at as far with the provision, but overall, we don't expect a substantial change in our allowance methodology.

Operator

Our next question will come from Brock Vandervliet of UBS. Please go ahead.

Brock Vandervliet -- UBS -- Analyst

Great, thank you. Could you talk about what you're seeing in terms of your Asian subsidiary? What are activities in China looking like in terms of loans and deposits? How has the tone changed if at all in the last quarter or so?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, Greater China region, the total loan portfolio is $1.3 billion as of today, and they have continued to grow in a nice pace because -- obviously because of this tariff (ph). And it was so much smaller than the United States, so obviously percentage growth is higher. And we deliberately built our cross-border teams and enhanced the capability and the expertise in our Greater China region. And I do feel that they are making decent progress today because with their knowledge of -- understanding the US-China current situation and current dynamics, they are able to identify opportunities because the clients value their input, their expertise and their knowledge. So they are making -- making stride in terms of bringing new customers one customer at a time. We're only doing commercial banking business in the Greater China region. We're not in the retail side. So, so far, our new relationship are all commercial banking business and many of them do have some sort of like a US-China cross-border, the type of activities there, and I expect that to continue to grow in 2019 and beyond.

Brock Vandervliet -- UBS -- Analyst

Okay. And as a separate question, you mentioned the capital call portfolio. How large is that portfolio and how do you see the competitive intensity around that segment?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

As of the end of the year, the capital call portfolio, our PE portfolio was about $1.2 billion -- outstanding -- $2 billion (ph) commitment.

Dominic Ng -- Chairman, President and Chief Executive Officer

And so far they're doing good. I mean, we started about five, six years ago and they continue to grow on an ongoing basis and we expect them to continue to be able to do well in 2019 and beyond.

Operator

And our next question will come from David Chiaverini of Wedbush. Please go ahead.

David J. Chiaverini -- Wedbush -- Analyst

Hi, thanks. Couple of questions. So a lot of economists are calling for a slowdown in GDP growth in 2019. Would you consider slowing your loan growth to below the 10% guidance if you see a slowdown? Or would you even consider slowing growth pre-emptively?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, I think that's really -- it's not like -- my view is that it's not what we deliberately slow down based on -- to be in alignment with GDP and so forth. I think it's more or less like that we need to be substantially more vigilant toward our credit portfolio, and we started that in fact over two years ago internally. We looked at -- with the GDP rising for -- two years ago is almost a decade their time and we had a bull market that kept going up. We had real estate prices keep going up. Where is the upside? When we look at the economic situation, we look at those signs over two years ago. We just don't see a lot of upside potential in terms of the economic condition to continue to keep sort of like charging up stronger and stronger. And knowing that there is going to be a likelihood, there is going to be some sort of like either slowdown or the stock market have to probably make an adjustment and so forth, which we've seen in fact in 2018. And that's sort of anticipated on that standpoint, and that's what we stay vigilant in terms of making sure that we have a strong -- very strong underwriting criteria and we scrutinize our portfolio in a more robust type of monitoring. And so those are kind of things that we -- we started working on and building a better credit risk management capability. And we will continue to stay vigilant and be very careful and looking at our loan portfolio just to make sure that we do not push the envelope too much. Our organic loan growth that we've projected right now, that's our guidance based on what we've seen. If there are some very, very dramatic situation or any kind of outcome that cause us not be able to originate the loans with the kind of like strong underwriting that we expect, obviously we end up substantially slowing it down. And so we just kind of like run our business with the basic common sense and do what's best for the Bank. I mean, we'd like to grow but we'd never want it to grow for the sake of potentially taking substantial loan losses and that's just going to be contradictory to the East West principles. So we -- I feel pretty comfortable with that while we put a guidance out. I mean, after all, it's a guidance; it's not something that we have to stick with it when the economic condition change. So we'll adjust it accordingly based on the circumstances. Frankly, in last year, with the US-China situation -- it's not like that they won (ph) we know 100% comfortable with that sort of like, in crisis we'll find opportunities. We have to work our way through too, so we expected that our loan growth may slow down and may get below our guidance. Surprisingly, our team executed and ended up getting above that. It's not because we push it, just happened, that because somehow we find more opportunities. So in 2019, who knows what the economic direction is going to go? But what we do know is that we're going to be looking at every credit portfolio very carefully and making sure that we're doing the right thing, and if the opportunity is out there that allow us to take on additional new clients and helping our existing clients to expand their business, so be it, and we'll do more. But if the opportunity is not there, then obviously we'll slow down. So that's what we are.

David J. Chiaverini -- Wedbush -- Analyst

And as a follow-up to that, have you tightened lending standards at all over the past couple of quarters or do you plan to over the next couple of quarters?

Dominic Ng -- Chairman, President and Chief Executive Officer

It depend -- it varies on different specific type of borrowers or specific industries. Again, we adjust our credit underwriting based on the circumstances that we see in the market. And so -- there is nothing specific that I can share with you that -- which direction -- which particular one that we made -- tightened up a little bit more here and there, and then those condition also keep changing -- depends on the circumstances we see in the next several months.

Operator

And ladies and gentlemen, at this time we will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Dominic Ng for any closing remarks.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you. Thank you all again for -- on joining our call, and we're looking forward to speaking to you again in April.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

Duration: 60 minutes

Call participants:

Julianna Balicka -- Director of Strategy and Corporate Development

Dominic Ng -- Chairman, President Chief Executive Officer

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Jared Shaw -- Wells Fargo -- Analyst

David Rochester -- Deutsche Bank -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Christopher McGratty -- KBW -- Analyst

Michael Young -- SunTrust -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Aaron James Deer -- Sandler O'Neill and Partners -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Brock Vandervliet -- UBS -- Analyst

David J. Chiaverini -- Wedbush -- Analyst

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