East West Bancorp Inc

NASDAQ:EWBC

Earnings Call Transcript 2019-Q4

[Operator]

Good day and welcome to the East West Bank Corp's Fourth Quarter and Full Year 2019 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [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, Strategy and Corporate Development]

Thank you, Sarah. Good morning and thank you everyone for joining us to review the financial results of East West Bancorp for the full year and the fourth quarter of 2019. 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 Private 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 the 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 10K for the year ended December 31, 2018.

In addition, though the numbers referenced on this call pertains to adjusted numbers, please refer to our full year and 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 found on the Investor Relations Website. As a reminder, today's call is being recorded and will also be available in a replay format on our Investor Relations Website. I will now turn the call over to Dominic.

[Dominic Ng, Chairman, President, and CEO]

Thank you Julianna. Good morning and thank you everyone for joining us for our full year and fourth quarter 2019 earnings call. I will begin our discussion with a summary of results on Slide 3. This morning we reported full year 2019 net income of 674 million or $4.61 per share, down by 4% compared to full year 2018 net income of 704 million or $4.81 per share. Now, excluding non-operating income, I'm sorry, excluding non-operating items we reported full year 2019 adjusted net income of 708 million or $4.84 per share, an increase of 4% compared to full-year 2018 adjusted net income of 682 million or $4.66 per share. Fourth quarter 2019 net income was 188 million or $1.29 per share, up by 10% compared to the third quarter net income of 171 million or $1.17 per share and also up by 9% compared to the fourth quarter of 2018 net income of 173 million or $1.18 per share.

Fourth quarter 2019 adjusted net income was 187 million or $1.28 per share up by 9% quarter-over-quarter and up by 8% year-over-year. In 2019 East West achieved record full year revenue of 1.7 billion, which grew by 5% year-over-year and record net interest income of 1.5 billion, which grew by 6% year-over-year. We ended the year with record loans of 34.8 billion, an increase of 7% from last year, and record deposits of 37.3 billion, an increase of 5% from 2018. 2019 also end a transformational decade for East West, during which we moved with more than double our SSIs to 44.2 billion and grew both our commercial loans and our non-interest bearing deposits nearly fivefold. Over the past 10 years we achieved substantial growth and diversification in loans, deposits, and revenue strengthening the resilience of our balance sheet, earnings, and profitability. Our diluted earnings per share also grew by 458% in the decade.

Our growth and profitability reflect the strength of our diverse business model, which is the foundation for continued solid financial performance for years to come. In 2019 we earned a return on assets of 1.59%, a return on equity of 14.2%, and a return on tangible equity of 15.9%. This is the fifth consecutive year of a return on tangible equity above 15%. On Slide 4, you can see the five quarter trend in our ratios, our profitability was once again strong in the fourth quarter. Our fourth quarter 2019 return on assets was 1.68%, return on equity was 15%, and a return on tangible equity was 16.7%.

Moving to slide 5, our loan portfolio is well balanced between commercial, commercial real estate, and residential mortgage loans. Over the past 10 years we've steadily made investments in people and our infrastructure building specialized commercial lending verticals, expanding our cross-border capabilities, and broadening our lending solutions. This has resulted in a diversified platform capable of generating above industry organic loan growth year in year out. As of December 31, 2019 total loans reached a record 34.8 billion, an increase of 2.4 billion or 7% as I mentioned earlier. Full year 2019 average loans of 3.4 billion grew 3.1 billion or 10% over last year. By portfolio Residential Mortgage grew 15% year-over-year. Commercial real estate and CMI both grew by 9%. In dollar terms loan growth was evenly distributed across the three sectors which all grew just over $1 billion each.

For the fourth quarter of 2019 average loans of 34.4 billion grew by 9% linked quarter annualized. We saw very strong growth from commercial real estate which increased by 505 million or 15% linked quarter annualized followed by residential mortgage which increased by 247 million or 12% linked quarter annualized. In fact the fourth quarter of 2019 was the best quarter in the history of East West in terms of single family residential mortgage originations. Average commercial loans grew by 34 million of 1% quarter annualized. And with that I will move on to review our 2020 outlook.

Apologize for that, let me go back to my script in order. The average loan growth of 10% in 2019 was achieved in a challenging environment including three interest rate cuts by the Federal Reserve, a slowing economy, and an ongoing U.S. China trade tension that started to escalate in 2018 and remained high throughout the past year. At East West the headwinds from the U.S. China trade tensions are most easily visible in our wholesale trade portfolio which typically shows seasonally strong growth in the fourth quarter. Instead last year we saw a decrease in commitment of 7% and a decrease in loan outstanding of 12% year-over-year.

As of December 31, 2019 we have commitments of 2.35 billion and loans outstanding of 1.4 billion in our wholesale trade portfolio. However, what is less visible is the focus and active management of our commercial loan portfolio throughout 2018 and 2019. Over the course of the past two years where we could actively reduce credit exposures particularly to customers with higher direct or indirect tariff related credit risk, largely concentrated in the wholesale trade and manufacturing. Importantly we have experienced only loan charge off related trade tariffs and it was less than $1 million. East West is starting the new decade with confidence knowing that our portfolio is better positioned and stronger today and we are ready to support our customers as the geopolitical backdrop improves.

With the signing of the partial trade agreement on January 15th we believe that there is more clarity surrounding the U.S. China trade dispute. In addition our customers have adapted to the new normal of U.S. China relations in terms of their operations and cost over the past two years and reduced tariffs uncertainty and geopolitical volatility should only allow them to resume growth. This project should have a positive impact for East West in particular for our ability to grow our cross-border loans and expand our cross-border customer relationships. The value of the expertise that our cross-border bankers bring to the table has only increased. We see renewed interest from Chinese firms exploring direct foreign investments or evaluating expansion opportunities in the United States in the manufacturing, energy, or service sectors. Furthermore the expected increase in purchase of U.S. manufactured goods by China provides cross-border trade expansion opportunity for our customers.

Also now more than ever the need for U.S. based business to develop a China strategy and understand the Chinese market dynamics is vital. East West is well positioned to take advantage of the evolving nature of the U.S. China cross-border business and we are confident about our ability to expand both our commercial and consumer market share in this sector in 2020 and future years. For the full year 2020 our current outlook for end of period loans is growth of 7% to 8%. We expect that to grow in 2020 will come from across all of our major loan portfolios of commercial real estate, residential mortgage, and C&I.

Now moving on to Slide 6 for a discussion of deposits, as of December 31, 2019 our end of year loan to deposit ratio was 93.2%. As we have previously stated we are comfortable operating with a loan to deposit ratio in the range of 90% to 95%. Total deposits grew to a record 37.3 billion as of December 31, 2019, an increase of 1.9 billion or 5% year-over-year. Full year 2019 average deposit of 36 billion exclude 2.8 billion or 8% from 2019. Average deposit growth for the 2019 full year primarily came from growth and deposits and interest bearing checking partially offset by a decrease in non-interest bearing demand accounts that happen in the first quarter of last year. In fact after declining in the first quarter due to a shift to interest bearing checking for certain customer balances, our non-interest bearing demand deposits steadily grew quarter-over-quarter in the second, third, and fourth quarters.

For the fourth quarter of 2019 average deposit of 37.4 billion grew by 10% linked quarter annualized. Average deposit growth in the fourth quarter was led by a growth in interest bearing checking which is seasonally strong in fourth quarter for some of our commercial customers, follow growth in non-interest bearing demand and money market accounts partially offset by a decrease in average time deposits as we actively reduce higher cost deposits. The fourth quarter 2019 average cost of deposit decreased by 11 basis points in the quarter to 0.94% and average cost of interest bearing deposits decreased by 15 basis points to 1.34% accelerating the pace of decrease from the third quarter. As of December 31, 2019 the end of period cost of deposits was 0.9% down by 11 basis points from 1.01% at the end of third quarter. The end of period cost of our interest bearing deposit was 1.28% as of December 31st down by 15 basis points from 1.43% as of September 30th. I'm pleased to note that since the Fed began cutting the fed funds rate in July we achieved a reduction in the cost of deposits across all of our major deposit types while at the same time also growing non-interest bearing demand balances. I will now turn the call over to Irene for a more detailed discussion of our fourth quarter 2019 financial results and our outlook for 2020.

[Irene H. Oh, EVP and CFO]

Thank you Dominic. On Page 7 we have a slide that shows a summary income statement and a snapshot of tax related and notable items during the quarter. For the fourth quarter 2019 we reported diluted EPS of $1.29 and adjusted EPS of $1.28. Our tax expense in the fourth quarter was 31 million and our effective tax rate was 14%. This compares to a tax expense of 35 million and effective tax rate of 17% in the third quarter. The decrease in the fourth quarter tax rate relative to the third quarter resulted from additional tax credit investments and a trough of previous year's tax reserves.

Our tax expense for the full year of 2019 was 170 million and the effective tax rate was 20%. Included in the full year 2019 income tax expense was a 30 million reversal of certain previously claimed tax credits. Adjusted full year 2019 tax expense was 140 million and the effective tax rate was 17% compared to a tax expense of 115 million on an effective tax rate of 14% for the full year 2018. In our outlook for 2020 we projected that our effective tax rate will be 15%.

Moving on to the discussion of net interest income on Page 8, fourth quarter net interest income of 368 million decreased by 1.6 million or 0.4% linked quarter. The fourth quarter GAAP net interest margin was 3.47%, a contraction of 12 basis points from the prior quarter. The quarter-over-quarter change in our GAAP net interest margin is as follows, a 15 basis point decrease from lower loan yields, a 4 basis point decrease from lower yields on other interest earning assets including investment securities, a 4 basis point decrease from the asset mix shift, and an increase in investment securities all of which were partially offset by an 11 basis point increase to the net interest margin from the lower cost of funds. ASC 310-30 discount accretion was 6 million in the fourth quarter, higher quarter-over-quarter due to recoveries, and added 6 basis points to the net interest margin.

The fourth quarter adjusted net interest margin excluding the impact of discount accretion was 3.41%. In the third quarter discount accretion income was 2.5 million which added 3 basis points to the net interest margin. As of December 31, 2019 the accretable portion of the ASC 310-30 discount accretion was 10 million and the impact of accretion on our net interest income and our net interest margin in 2020 and beyond is expected to be immaterial. As such we will no longer separately report the ASC 310-30 discount accretion.

In our 2020 outlook we expect that the GAAP net interest margin will range between 3.40% to 3.45%. This translates to a stable margin relative to our fourth quarter adjusted net interest margin of 3.41%. In our interest rate outlook we assume that the Fed funds rate will be unchanged in 2020. A tailwind to our margin supporting our NIM outlook for 2020 is a near-term repricing benefit of our maturing time deposits. In the first quarter of 2020 we have 3.9 billion of time deposits maturing at a weighted average rate of 1.79 and in the second quarter of 2020 we have another 2.3 billion maturing at a weighted average rate of 1.85. For comparison in the fifth fourth quarter of 2019 we originated or renewed 3.5 billion of time deposits at a weighted average interest rate of 1.28 down from a weighted average interest rate of 1.54 in the third quarter of 2019 for new and renewing time deposits.

For your reference we inserted Slide 9 which provides the underlying interest rate detail of our loan portfolio. Our fourth quarter 2019 average loan yield of 4.91 declined by 20 basis points linked quarter. Our loan portfolio is larger variable rate and the most impactful interest rate indices for our loans are the prime rate in one month LIBOR. Now turning to Slide 10, total net interest income in the fourth quarter was 63 million compared to 51.5 million in the third quarter. Fee income and net gains on sales of loans totaled 52.5 million in the fourth quarter, a 3% increase from 51 million in the third quarter of 2019. Interest rate contrasts and other derivative income was 18 million in the fourth quarter, a linked quarter increase of 9 million. Customer demand for interest rate hedging products continued to be strong in the fourth quarter and customer related revenue was 14 million, an increase of 3 million quarter-over-quarter. The associated credit valuation adjustments was 4 million in the fourth quarter, a linked quarter increase of 6 million reflecting the interest -- the increase in long-term interest rates at the end of the quarter.

Moving on to Slide 11, fourth quarter non-interest expense was 193 million, an increase of 9% linked quarter. Excluding amortization of tax credit investments and CDI our adjusted non-interest expense was 165 million in the fourth quarter of 2019, an increase of 4% quarter-over-quarter. The largest change quarter-over-quarter was a 3.2 million increase in compensation expense which was 101 million in the fourth quarter. Our fourth quarter adjusted efficiency ratio was 38.3% compared to 37.7% in the third quarter. Over the past five quarters our industry leading adjusted efficiency ratio has been under 40%.

Our full year of 2019 non-interest expense was 735 million and excluding amortization of tax credit investments and CDI it was 645 million, an increase of 4% year-over-year. Our full year adjusted 2019 efficiency ratio was 38.4% compared to 39.6% in 2018. The increase in non-interest expense for the full year 2019 compared to 2018 was largely driven by an increase in compensation expense reflecting hires throughout the year, that add talented bankers to our front line and to ensure that we continue to strengthen our risk management and support functions. Additionally in 2019 and continuing in 2020 we have been making ongoing and important investments in technology to better serve our commercial and consumer customers and to grow our market share.

In 2020 we'll be launching a new FX system and a new commercial digital banking platform in Hong Kong which will provide our customers enhanced cross-border payment and assets hedging capabilities as well as better interactivity with our domestic, commercial, digital banking platform. Furthermore we are continuing to build a new consumer digital banking platform tailored to the distinct needs of our consumer customer base. Inclusive of these investments and these systems and platforms and other ongoing efforts to invest in our business, our outlook for 2020 assumes operating expense growth of 4% excluding amortization of tax credit investments and core deposit intangibles. This is similar to the rate of operating expense growth in 2019.

In Slide 12 of the presentation we detail our critical asset quality metrics. Our allowance for loan losses totaled 358 million as of December 31, 2019 or 1.03% of loans held for investment compared to 1.02% as of September 30, 2019 and 96 basis points as of December 31, 2018. Non-performing assets as of December 31, 2019 were 122 million or 27 basis points of total assets compared to 31 basis points of total assets as of September 30th and 23 basis points of total assets as of December 31, 2018. For the fourth quarter of 2019 our net charge offs were 8 million or annualized 10 basis points of average loans, and we have reported a provision for credit losses of 19 million. This compares to net charge offs 22.5 million or annualized 26 basis points of average loans and a provision for credit losses of 38 million in the third quarter of 2019. Included in the fourth quarter net charge offs of C&I loans which totaled 11 million was an 8 million forward cover on the C&I loan as well as a 5 million charge off on an energy loan that had been placed on non-accrual status earlier in the year. Other C&I charge offs in the fourth quarter came from loans that were also previously on non-accrual status and these have largely been reserved for as of September 30, 2019.

For the full year 2019 net charge offs were 53 million or 16 basis points of average loans compared to 13 basis points in 2018. Full year 2019 provision for credit losses was 99 million compared to 64 million in 2018. Overall, asset quality continues to be stable. Quarter-over-quarter non-performing assets and net charge offs decreased. As of December 31, 2019 classified and criticized assets totaled 974 million compared to 970 million as of September 30, 2019. Currently we estimate that the day one CECL related increase to our allowance for loan losses will be an increase of approximately 30% from the allowance for credit losses as of December 31, 2019. Our current outlook for 2020 projects that the day two provision for credit losses will range between 90 million and 120 million for 2020. This reflects our projected loan growth and our view that asset quality should be broadly similar in 2020 as in 2019. Further the range of our provision outlook also takes into account the volatility that we expect to see as a result of the forecast changes during 2020 that will drive the CECL model.

Moving on to capital ratios on Slide 13 East West capital ratios are strong. Tangible equity per share of $31.15 as of December 31, 2019 to 3% linked quarter and grew by 15% year-over-year. The tangible equity to tangible assets ratio increased by 67 basis points year-over-year and our regulatory capital ratios increased by 45 to 75 basis points year-over-year. East west Board of Directors has declared first quarter 2020 dividend for the company's common stock. The common stock dividend of $0.275 is payable on February 14, 2020 to stockholders of record on February 3, 2020.

And with that I'll move on to reviewing our 2020 outlook on Slide 14. For the full year of 2020 compared to our full year 2019 results we expect end of period loans to increase by 7% to 8%. We expect that the GAAP net interest margin will range between 3.40% and 3.45%. Our outlook incorporates no change in the fed funds rate in 2020. With this outlook for loan growth and net interest margin and reflecting the decline in interest rates in the second half of 2019 as well as declining accretion income in 2020 we expect that net interest income in 2020 will range from flat to growth of 2% year-over-year. We expect non-interest expense excluding the amortization of tax credit investments and core deposit premiums to increase approximately 4%. We anticipate that the provision for credit losses will range between 90 million and 120 million.

Finally we project that the effective tax rate will be approximately 15% for 2020 as we expect to continue to invest in tax credit investments. We expect to make approximately 100 million of historic and clean energy tax credit investments in 2020 and project an amortization rate of approximately 85%. For the first quarter 2020 we currently expect tax credit amortization will be approximately 20 million. With that I will now turn the call back to Dominic for closing remarks.

[Dominic Ng, Chairman, President, and CEO]

Thank you Irene. I will now open the call to questions. Operator.

[Operator]

[Operator Instructions]. Our first question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Good morning. I guess just first question Dominic, well you talked about just the impact from the China trade dispute on the wholesale trade portfolio and then there's been enough conversation around whether how meaningful that impact has been on your C&I growth. Would love to get your sort of thoughts around how you expect 2020 to play out for the C&I lending both in terms of the specialty lending verticals where East West has been focused on and in terms of geographies and all the hiring that you've done, are you going into new markets, like what's going to be in your view driving growth on the C&I side?

[Dominic Ng, Chairman, President, and CEO]

Well, at this point I think that we expect that growth comes from many different industry verticals and then the general C&I and also of course including Greater China and our cross-border business. And we feel that in general there are different pockets of areas that will grow stronger than the others. But the overall economic condition based on a more clarity with this U.S. China dispute that resulted in the Phase I signing gives many of the business and our customers more comfort to start investing and growing the business and in addition to that when you look at the agreement that was signed which call for China buying 200 billions more of goods from the United States from the baseline of 2017 and that is 77 billion from 2020 and 123 billion in 2021 in various sectors including manufacturing energy and services, etc. And we feel that clearly there are opportunities for some of our clients who are exporting to China and East West is going to pay attention to those opportunities to make sure that we get our share of banking business. So all in all I would say that 2020 particularly in the second half and 2021 is looking pretty promising.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Got it and just I guess on a separate topic you mentioned investments in the FOREX platform in Hong Kong and in the consumer digital platform here, where should we see the benefits on the upsides of all those investments, is it in higher fee revenue, or in better deposit growth, and just kind of should we expect these to be needed more in terms of growth?

[Dominic Ng, Chairman, President, and CEO]

Both, I mean like obviously for the FX new system it will be predominantly for fee income. But keep in mind when we have a strong FX value proposition that can be a lead in for us to get commercial banking business which will then result in loans and deposit too. Now, but that's more indirect. I think the direct part will be fee income. From the digital banking side that's really a predominant focus on our consumer core customer base. And so for that I think it will be consumer core deposits, interest bearing checking account, non-interest bearing checking account and so forth. And we expect that there will be more core deposit coming and that will be in the next few years.

[Operator]

Our next question comes from Chris McGratty with KBW. Please go ahead.

[Christopher McGratty, KBW]

Great, thanks for the question. I'm interested credit quality has improved pretty notably sequentially. There's some concerns I believe on residual effects of the energy stress in the third quarter. Could you provide maybe an update on what you're seeing in that portfolio, maybe trends in classifieds and I believe there was a notable bankruptcy earlier in the quarter, I'm wondering if that's kind of an address in the current reserve? Thanks.

[Irene H. Oh, EVP and CFO]

Yes Chris. So if we look at the energy portfolio, just to answer your question specifically, the problem loans that we identified earlier in the year and talked about in a little bit more detail on last earnings call I think the good news is there really hasn't been a lot of new problem loans that haven't been identified. The one loan that you are referring to was downgraded and in our view is appropriately reserved for in the fourth quarter. In total if you look at the balances as of September end of -- kind of actually the outstanding balances as of the end of September for criticized and classified assets was about 68 million and as of the end of December that was 113 million. Non-recurring loans, same kind of levels for September were 21 million versus 33 million as of the end of December. Hopefully that helps to clarify some of those questions you have Chris.

[Operator]

Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.

[Jared Shaw, Wells Fargo Securities]

Hi, good morning.

[Irene H. Oh, EVP and CFO]

Good morning Jared.

[Jared Shaw, Wells Fargo Securities]

Yeah, looking at the growth expectation, the loan growth expectations for 2020 of 7% to 8%, does that assume that the wholesale trade business balances stay under pressure and if we saw a more Phase 2 or more confidence in the consumers -- on the customer side could you see loan growth potential be higher than that with the resumption of stronger wholesale trade lending?

[Dominic Ng, Chairman, President, and CEO]

Well, I think that we expect a positive turn around hopefully sometime 2020. But now we have to keep in mind is that it's going to be a gradual process and if you look at as I indicated in my remarks earlier, in fact, normally in the fourth quarter, we would have a surge of the wholesale trade portfolio balances and the last quarter we actually didn’t. And it's because everybody is holding out, everyone knew that our President will be signing a Phase 1 and so we all sort of stand in the sideline and then say why do something until we see what exactly is going to be signed on. And now once we get that clarity, I think people is going to start focusing on what needs to be done. Some got great benefit because they are exporter to China. Some also even as importer because of the agreement of not putting tariffs on those particular products or the agreement to drop from 15% to 7.5%, that helps. And then while others basically stayed the same at that 25% tariff.

Now the fact is even for those who have to pay tariffs, I mean in the way the good news is that now they know it's not jumping to 35% or 40% or 50% or is not having the very high uncertainty that's going on the rhetorics coming from our President and so forth. So at that standpoint people had dealt with those tariffs and managed it for the last two years and many of them have managed it pretty well in terms of whether it is cutting costs a little bit here and there, having the Chinese government to provide tax credit -- tax subsidy, or just pass right through to U.S. consumers. And US consumers also seem to be taking those pass through very nicely as we have seen in the retail report for the fourth quarter so far.

So all-in-all I see that there will be a little bit more normalization of trade activities going on in 2020. It's going to take a few months to ramp up and so I would expect that in the first two quarters we shouldn't be expecting a whole lot of substantial growth, but then we will be more like maybe like last year but then in the third and fourth quarter it ought to be picking up. That's what I see on the trade side. But for the other portfolio I think it will be more or less of people looking at the general U.S. economy that I think clearly with the uncertainty of trade dispute by the way is not just with China but also with many of the other countries have caused concern for many U.S. business and now when the business overall see what the -- overall interest rate climate plus of the settlements of the trade tariffs and so forth, I think in general that this is a sentiment that is getting little bit more comfortable. So we hope that the other C&I protocols that we are hopefully also be picking up a little bit. So that is assumption that we have. And in terms of looking at 2020 outlook and beyond.

[Jared Shaw, Wells Fargo Securities]

Thanks and just circling back on capital management. I know this is something asked on other calls, but capital continues to grow, the TCU ratio is still growing and at substantial level. What else should we be thinking about in terms of capital management with growth in the similar ranges we saw in 2019, I guess why not come in and do a buyback, and help manage capital at this point?

[Dominic Ng, Chairman, President, and CEO]

I think -- I would reiterate what we share I think I guess in a more than two conference calls before that while first and foremost we and our management team that are shareholders friendly including our Board by the way. So we are constantly at our Board Meetings evaluating and review this sort of opportunity because of our capital, should we should we not buy back. And that I'm pretty sure in our next Board Meeting we will have another very detailed discussion of this sort of alternative out there versus buyback. One of the things that we do looked at there, as we just shared in this earnings call we have well above industry average return of asset and return of equity.

Our loan growth last year, average loan growth is about 10% and so we're still doing pretty well. And the other interesting part is that with this new dynamic that we assume right now that China has signed agreement in terms of better protect intellectual property and better protect companies who lets say are being pushed to transfer technology and China now has mechanism in place to penalize stay on enterprises or any government entities who do that. So when we see there's a better clarity in these laws that attract foreign investment, when the Vice Minister just announced that how much China wanted to attract foreign direct investments. And in fact foreign direct investments in China even in 2019 have grown by a few percent. And all those are indication that we at East West Bank wanted to make sure while we are looking at the obvious good choice of potential capital buyback.

We also need to balance to see that is it likely there will be a great opportunity what is in the U.S. or in Greater China that we wanted to further invest to ensure we have an even stronger sustainable profitable performance for many years to come. And I can only reflect back in the last 10 years we have deliberately spend our capital into investing in people and infrastructure, which allow us to build such a very diverse loan portfolio and deposit portfolio so that allow at any particular time of year that if some particular sector slow down the other sectors pick up. There are not many banks in the country that have a very evenly spread of C&I, CRE, and residential consumer portfolio that spread out very nicely in different categories and allow us to put lever at different time.

We would like to continue to further diversify our loan portfolio, improve our fee income, etc and so we continue to make those investments. But at any point of time we feel that even with those investments and we still have excess capital that is redundant, that obviously we will step in and start making a buyback. So that's the plan.

[Operator]

Our next question comes from Brock Vandervliet with UBS. Please go ahead.

[Brock Vandervliet, UBS]

Thank you for the question. The derivatives business was obviously a great quarter, great couple of quarters here. You know with the FED probably done should we be looking for this to kind of tail off or not?

[Irene H. Oh, EVP and CFO]

Yeah, Brock so if you look at 2019 from a customer revenue perspective, the revenue from interest rate contracts and other derivatives was 42 million, net of the CVA adjustment rounding there at 40 million. But when we look at 2020 although we're confident that we will be able to grow fee income line items from all other categories, just given the nature of the rate curve, the inversion earlier this year that really supported the volume increase we had in the third quarter in particular and second quarter. We don't expect this level of customer revenue in 2020 for IRC.

[Brock Vandervliet, UBS]

Got you, got you, okay. And separately as you could imagine CECL is providing all sorts of fun with numbers for analysts. And as I look at your reserve at the true up and what you're anticipating for provisions, can you help us dimension what you may be looking at in terms of charge offs, as a number of 20 basis points, is that reasonable to expect going forward or too high?

[Irene H. Oh, EVP and CFO]

Yeah. So Brock, that's a great question. And, I want to just kind of caution, this is our view today for the day one reserve. You know, actually that may change as our models change, forecasts change, and there's some finalization that we're still doing particular on the qualitative factors. But, given the call we wanted to share what our views were today and that is that 30% increase from the year end and current model calculation. On day two we have traditionally given the guidance on the provision for the full year. As you probably have noted, the range that we're providing for the provision is wider and that's largely given our kind of views that compared to the incurred model. Likelihood is that there'll be more volatility on the provision over the course of the year driven by kind of changes to the forecast. So that's certainly what we're factoring. Overall when we look at the credit environment, we think it will be relatively the same and with those numbers, we're modeling in kind of gross charge offs at similar levels to 2019 if that is helpful for you.

[Operator]

Our next question comes from Michael Young with SunTrust. Please go ahead.

[Michael Young, SunTrust Robinson Humphrey]

Hey, good morning. Thanks for taking the question. I wanted to ask about the sort of loan to deposit ratio. I know, Dominic you mentioned that you wanted to continue to operate within the 90% to 95% range but given kind of where rates are and the stability here, do you think that you'd allow that maybe to drift higher as it may be easier to put on new deposits at lower rates now?

[Irene H. Oh, EVP and CFO]

Yeah, I think first and foremost we always want to ensure that we have enough liquidity, right, and that we have enough core deposits to fund our loan growth. That franchise value for a bank is that core deposit franchise. So, that range that we have, the 90% to 95% is a range that we're comfortable with. At this point in time I do not think we'll inch that up much higher. And to kind of more specifically address your question, if we have the opportunity to reduce kind of -- bring on additional deposits at a lower cost what we'll probably do with that is lead some of the higher operating -- higher cost deposits run out.

[Michael Young, SunTrust Robinson Humphrey]

Okay and then as a follow up, I think at the beginning of last year, you had mentioned a couple of demand deposit focused initiatives, particularly on the consumer side. I just wanted to get an update if any of those were moving ahead or if we've seen any benefits from those at this point?

[Dominic Ng, Chairman, President, and CEO]

It went very well in 2019, and so with that in momentum, we will continue in 2020. So our consumer banking team, specific to retail branches are all geared up to keep going out there and bringing in small business customers one at a time. And then we opened many, many accounts last year and I expect them to continue to use their center of influence to help them, CPA, lawyers, and so forth to help them to continue to open the small business account one at a time.

[Operator]

Our next question comes from Gary Turner with D.A. Davidson. Please go ahead.

[Gary Turner, D.A. Davidson]

Thanks. Good morning.

[Irene H. Oh, EVP and CFO]

Good morning, Gary.

[Gary Turner, D.A. Davidson]

Good morning. I wanted to ask a question or a question on 2020 loan growth outlook maybe a little different way. If we look at 2019 the end of period year-over-year loan growth was a little over 6% and certainly pressured in the fourth quarter by not having wholesale trade benefit that you typically do. So Dominic given your comments about a better outlook for the back half of the year on wholesale trade as there's some more clarity for your customers, why wouldn't that normalization maybe for 2020 help a better, more positive rebound in overall loan growth, is it the expectation of a slowdown or slower pace of growth in the other loan segments?

[Dominic Ng, Chairman, President, and CEO]

Well, I think that overall what we project right now is based on our current activity and we do expect that some of these sort of positive momentum is going to take a little bit time to ramp up. So therefore and right now, we prudently project it to be 7% to 8%. Obviously we'll revise our guidance if we actually see even stronger momentum going forward.

[Gary Turner, D.A. Davidson]

Okay, the rest my questions were asked and answered. So thank you.

[Dominic Non-GAAP]

Thank you.

[Operator]

[Operator Instructions]. Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

[David Chiaverini, Wedbush Securities]

Hi, thanks. A couple questions for you. So the first one I wanted to follow up on energy, are you planning to grow the energy book or do you -- or conversely do you plan to reduce or exit this portfolio given the credit issues?

[Dominic Ng, Chairman, President, and CEO]

At this point, I don't think there is any -- and there's going to be a very low likelihood of any growth. The reason is because obviously as everyone know and in the industry that the equity investors are hard to find in these days. So therefore, in order for us to do good deals we need to have strong equity partners to have us to put on senior debt. Quite frankly, at this point right now I think the likelihood of what's growing is very, very low. I think that there will be a higher likelihood we probably will reduce the portfolio just naturally because of some pay down and so forth.

[David Chiaverini, Wedbush Securities]

Thanks for that. And then shifting gears, more of a housekeeping question, but you mentioned about the guidance for tax credit amortization expense. You said, 20 million for the first quarter and you gave the full year amount but do you happen to have any guidance for the second quarter, third quarter, and fourth quarter?

[Irene H. Oh, EVP and CFO]

We do not at this point. But you have the full year number and that will help you.

[David Chiaverini, Wedbush Securities]

Yep. Thank you.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

[Dominic Ng, Chairman, President, and CEO]

Well, thank you all for joining the call. First, I wanted to apologize for a little bit of a confusion of my remarks earlier because my mind has already gone to celebrating the Chinese Lunar New Year that will be coming this Saturday, by the way. This is a very, very special year, the Year of the Golden Rat is one of these one out of every 60 year that would happen. It's the longest year ever for Chinese New Year because it's 384 days and there are a lot of special days throughout this year, which I would see that many of our customers would have weddings, give birth, and starting new business, etc, etc. So East West Bank is going to be busy. And so we hope that this most auspicious year that happens only once every 60 years will bring better fortune and success to everyone around the world. And on behalf of all my associates at East West Bank I would like to wish you all Happy Lunar New Year. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.