Bank of Hawaii Stock: Tough Quarter But Outlook Is Favorable (NYSE:BOH)

We have to tell you that this market is still in bad shape with sentiment being so low, although we have had some reprieve this earnings season, as for all the companies that have reported, thus far, things look really strong. What we do know is that inflation has yet to subside, and the Fed is committed to a few more hikes. The averages are doing better than we thought they would, considering the pressing inflation and more hikes to come.

That said, we have been looking into sectors to buy. One sector we are very bullish on is the banks, and specifically regional banks. Not all of these banks are created equal. Some have unique markets, unique portfolios, varying dividend policies, some are growing deposits and loans, others are not. We have recently been covering a wave of banks between our public columns on Seeking Alpha, and our BAD BEAT investing service.

This morning we were asked about the Bank of Hawaii Corporation (NYSE:BOH). As you likely guessed, this bank serves customers in the Hawaii market. The company just reported disappointing earnings, and the stock is falling. However, in our opinion, we believe that, being a regional bank serving the Hawaiian Islands, the stock will do well as economic activity, namely tourism, returns to the Hawaiian Islands. Look at the demand in the airlines, as an example. Travel is really strong, including to Hawaii. This bodes well for this bank. You also get a nice dividend yield approaching 4% to wait for the turnaround as well. Let us discuss.

Bank of Hawaii Q3 headline earnings

A lot of this Fed-induced market pain is creating some opportunity to enter badly beaten-down stocks and profit from a turn. We like banks here. We are of the opinion that it is time to take advantage of this decline for long-term positioning.

Look, we will never catch the full bottom, but look for stocks with some yield going on sale. We are seeing that today here for Bank of Hawaii. The next couple of quarters will still be tough for American business as recession likely looms, but as far as banks are concerned, the high rates are going to feed net interest income for years to come. The market has and continues to price in uncertainty, but after this report, BOH stock also offers a decent valuation, on top of the nice yield.

Position yourself ahead of a rally. So the stock is falling today after the just reported earnings. But why? Well, the company came up a bit short on its revenue and earnings. The bank reported net revenues of $172.3 million in Q3 2022. This was a miss versus consensus expectations. It was a 2.4% increase from last year’s quarter. But consensus was about $11 million higher at $183 million, so this is disappointing. The lower top line led to a lower bottom line too.

Provisions for credit losses are back on the rise as banks prepare for a possible recession and some delinquencies. Considering the top line came up short, we thought earnings would be worse and imagined the bank would set aside some provisions. However, there were no provisions credit losses in the quarter. That is a good sign, but keep in mind, there may be some in the future. On the flip side, there also were not credits. Given the trends we had seen with other banks, we thought we would see some provision activities. The Hawaiian Islands are so dependent on tourism, and that situation seems to be improving. No provisions along with moderate expenses decreased non-interest income, and better interest income combined to lead to EPS of $1.28 in Q3, which was a decrease from $1.38 in Q3 2021. So what is going on here?

So we have to understand what is happening here. Net interest income was $141.7 million, an 11.6% increase from a year ago and up 6.6% from the sequential quarter. We expected nice growth here because rates really started to move higher the last few months. Net interest margin was 2.60%, up sizably from a year ago, which saw 2.32%. It was also up nicely from the sequential quarter’s margin of 2.47%. This is great. We saw margins as remaining moving higher and believe they will continue to do so. Now, where there has been some insane pressure is on noninterest income which is under extreme pressure due to lower origination fee revenues, as well as some special charges related to selling assets. You couple this with some rising noninterest expense and we have the recipe for lower earnings from last year. But moving ahead, we like what we see.

Loan and deposit growth

We always look for loan and deposit growth for any bank we examine. Compared to a year ago, we are seeing both loan and deposit growth. Deposits were $20.9 billion, an increase of 1.9% from a year ago. It is great to see more available capital to lend. And the company is lending nicely. The total loans the company has were $13.3 billion, which is a jump up of 2.9% from just last quarter and was a solid increase of 10.3% from a year ago. We love to see this growth, but we also care about operational efficiency and asset quality.

Operational efficiency

This is another reason the stock took a dip. The efficiency metrics we follow worsened from a year ago and sequentially, and this is a bearish point. Most of this was due to higher expenses, which led to the decline in earnings. We think 2023 sees improvement on all of these metrics as margins improve, and the economy starts to emerge from recession. The return on average assets was 0.91%, dipping from 1.0% in Q2 2022, while the return on equity was 16.98%, down from 18.19%. Perhaps not surprising, the efficiency ratio worsened to 61.37%, versus 58.80% in Q2. We need to keep an eye on this metric, but at a new 52-week low, a lot of this weakness in these metrics is priced in here.

We also want to point out that credit quality metrics improved, and that is positive. We saw net charge-offs fall to just 0.03% of annualized outstanding loans, quite low. The allowance for credit losses declined $21.5 million from a year ago. The ratio is now just 1.1% of all loans, a huge improvement from 1.39% a year ago.

Take home

This was not a great quarter for Bank of Hawaii, but the asset quality metrics are strong. Hawaii depends on tourism, and that industry is thriving on all accounts. Higher rates have hurt demand in some industries, but Bank of Hawaii continues to grow loans and is making more per loan. That will pay off. At new lows, and a near 4% yield to be paid to wait, we think Bank of Hawaii is a buy here on further weakness.