anouchka
There’s a lot to like about Bank of Hawaii (NYSE:BOH), and that’s been the case for some time. With concerted efforts to drive share gains through service quality bearing fruit in terms of deposit and loan share growth over the past five years, not to mention solid records of respectable core earnings growth and capital returns to shareholders, Bank of Hawaii has a lot of core holding attributes for a small bank.
Valuation is high here, though, and it takes pretty robust expectations to drive a compelling fair value. Given a shaky outlook for sentiment on bank stocks for at least a few more quarters and a pre-provision growth outlook over the next three years that doesn’t really stand out from the pack, I can’t say that Bank of Hawaii is a compelling idea for me here today.
Adjusted Results Held Close To Expectations
While Bank of Hawaii’s reported results look lackluster compared to published sell-side expectations, underlying core/adjusted results were much more inline. Still, in an environment where there are many banks posting pre-provision beats, “in line” doesn’t really get it done, and especially for an already well-valued bank.
Adjusted revenue rose 8% year over year and 3% quarter over quarter, coming in just shy of expectations. Spread income rose 12% yoy and 7% qoq, just beating expectations. Virtually all of that growth was driven by better spreads (net interest margin up 28bp yoy and 13bp qoq to 2.60%, beating by about 3bp), with earning assets up a little less than 1% qoq. Adjusted fee income fell 2% yoy and 7% qoq, missing by about 3%.
Core adjusted expenses rose 8% yoy and 1% qoq, more or less matching expectations. Pre-provision profits rose 9% yoy and 7% qoq; Bank of Hawaii met expectations here, but the single-digit growth and in-line results don’t stand out so much this quarter. Provisioning and taxes drove a core beat, but below-the-line beats like this don’t typically get much credit.
Healthy Loan Growth, But Sustainability Is A Question
Bank of Hawaii posted 11% yoy and 3% qoq loan growth on an end-of-period basis, which compares pretty well with the banking sector at large this quarter. Growth was driven by commercial real estate (up 5% qoq on an average balance basis) and home equity (up more than 5%), while the large mortgage business grew 2%. Loan yields improved modestly; up 14bp yoy and 28bp qoq to 3.49%.
While Hawaii’s housing market is its own thing, and not always so tightly correlated to mainland trends, I still think BOH’s reliance on mortgage and home equity lending is going to weigh on loan growth relative to banks with more commercial lending leverage. This is consistent with management’s priority commentary, but it’s worth remembering as rate sensitivity is going to be less of a contributor to growth in the coming quarters.
Funding quality (and quantity) is becoming a bigger talking point in the banking sector, but BOH is in solid shape here. Deposits did decline 1% qoq on an end-of-period basis, up rose 1.4% qoq on an average basis, and the 1% qoq decline in non-interest-bearing deposits was better than average for the quarter. Deposit costs are ticking up, rising 13bp yoy and 12bp qoq, but Bank of Hawaii’s 20bp deposit cost is still quite good relative to the broader bank sector.
BOH is in good shape overall, with a loan/deposit ratio of less than 64% and a strong NIB deposit base (35% of total deposits). The bank isn’t going to be immune to rising deposit betas and higher funding costs, and I see only about 10bp-25bp of further NIM leverage from here through 2024.
The Outlook
Bank of Hawaii is in good shape with respect to capital, and I believe the bank could increase payouts to shareholders (dividends and buybacks combined) at a consistent rate in the mid-to-high single-digits for some time to come. One question I do have regarding capital management is whether management will ever harbor ambitions to acquire their way onto the mainland; the bank has done a very good job in its core Hawaiian market, but I think loan and deposit share gains will get more challenging from here.
I believe Bank of Hawaii can generate long-term core earnings growth on the low end of the mid-single-digits (around 4%), though I do think 2023 will be a more challenging year as higher provisioning mitigates some of the benefit of the high single-digit pre-provision growth I expect in FY’23. All told, I think the mid-to-high single-digit pre-provision growth that I expect from BOH over the next three years will set the bank as “good, but not great” compared to many other regional banks of similar size.
The Bottom Line
I value banks on the basis of discounted long-term core earnings, ROTCE-driven P/TBV, and P/E, and by all metrics Bank of Hawaii doesn’t look particularly cheap. I do see a high single-digit long-term total annualized return here (almost double-digit), but that’s not so exceptional now, and the shares likewise don’t look that undervalued on the shorter-term multiples-based approaches. Add in a still-weak sentiment overhang for bank stocks, and this isn’t really a compelling name for me at this moment, even though I do like the bank’s quality and long-term track record.
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