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I expected good things from Hancock Whitney (NASDAQ:HWC) in my last update on this Gulf Coast bank, and I haven’t been disappointed. While deposit outflows have been a little worse than I expected, deposit and loan betas have been quite strong and the company continues to execute well on costs. With that, the shares have outperformed since that last article, outperforming regional banks by more than 7% and bringing the year-to-date outperformance up to around 12%.
The only real negative I can’t point to here, apart from a deteriorating macro environment, is the valuation. Hancock Whitney has been doing well, but not well enough to drive substantial upside revisions to my numbers, and so the outperformance is chewing into some of the undervaluation I saw before. I’d rather own a more expensive high-quality bank than a cheaper low-quality bank, but investors probably shouldn’t expect much beyond a high single-digit to low double-digit return over the next year.
Funding Isn’t The Issue Here That It Is At Other Banks
As I’ve written recently in reference to banks like First Republic (FRC), Texas Capital Bancshares (TCBI), and Valley National (VLY), many banks are facing a squeeze from funding costs as rates continue to head higher. Banks lacking a large low-cost deposit base are increasingly having to turn to FHLB advances and hike rates on their CDs to bring the funds they need to grow their loan books. Not so with Hancock Whitney.
Hancock Whitney did see a greater-than-expected deposit outflow in the quarter, as a 3% qoq decline exceeded both management expectations and the roughly 1% norm for banks of similar size. Likewise, non-interest-bearing deposit attrition of almost 3% was worse than the norm for the subgroup. Even so, non-interest-bearing deposits are still close to half of the deposit base, and the bank’s relatively better loan/deposit ratio (around 76% versus a peer average in the 80%’s) gives the bank a little more flexibility.
Deposit costs were only 19bp in the quarter (up from 7bp in the year-ago and prior quarter), and that’s still well below average. That’s driving a strong (LOW) deposit beta – the cumulative deposit beta is only about 5% at this point versus a broader average closer to 22%. At the same time, the bank’s loan beta is a solid 26%.
Looking ahead, spread pressure is going to be something that the bank has to deal with proactively. Management is still looking to grow the loan book in the fourth quarter (at an annualized rate around 6%, down from the third quarter’s nearly 9% growth) and in 2023, and I find it very unlikely that deposits are going to start reaccelerating. If anything, a weaker macroeconomic backdrop in 2023 is likely going to lead to consumers and businesses tapping more of their bank deposits.
Deposit costs are already accelerating across the sector, with highest-rate CDs topping the beta (70% vs. 69%) for the prior cycle (2014-2018) with likely at least one more rate hike on the way. With that, it’s reasonable to assume that deposit betas will head higher, and indeed I’ve been consistent in writing/modeling higher betas than most managements and analysts expect. In the case of Hancock Whitney, though, while it’s possible that betas could still exceed expectations here, I find the 25% full-cycle cumulative target/estimate more credible than I do for many other banks.
What this all means in plainer English is that Hancock Whitney is likely to see less pressure from higher deposit costs and a relatively better net interest margin. I don’t expect torrid loan growth from this bank, but there should be enough growth here to drive relatively better topline and bottom line results.
Taking A Measured Approach To Growth
There’s not much new to report where Hancock’s growth priorities and expectations are concerned. The bank isn’t taking the same aggressive approach to loan growth as, say, First Republic, nor are the following in the steps of Pinnacle Financial (PNFP) and looking to disrupt attractive commercial loan growth markets by hiring away productive banking teams.
This is more of a “slow and steady wins the race” sort of story. Hancock enjoys a good share in large markets like New Orleans, Baton Rouge, and Gulfport, and isn’t seeing all that much in the way of competitive entries. By the same token, targeting commercial loan growth in markets like Dallas, Houston, Nashville, and Tampa is not exactly a novel strategy, and the bank is going to face increasing competition in these attractive commercial loan markets. Hancock’s funding base does provide some advantages, but it will be important for the bank to prioritize high service levels and specialty niches (like healthcare) to stand out from the pack.
While a more measured approach to growth does generally mean lower loan growth rates, it also allows for healthier efficiency ratios. Hancock’s efficiency ratio is now comfortably in the low-50%’s, and operating leverage will be an important driver in 2023 as loan growth and spread leverage becomes incrementally less helpful to banks.
The Outlook
Hancock Whitney is in good shape with respect to capital, and I wouldn’t mind seeing the company get a little more active on the M&A front with respect to fee-generating businesses. I don’t think whole bank M&A is high on management’s list of priorities right now, though expansion into adjacent markets like Tennessee, Texas, and Florida (at the right price) could make sense.
I’m still expecting mid-to-high single-digit core earnings growth from Hancock Whitney over the next five years and longer-term core earnings growth in the 6% to 7% range. Discounted back those earnings support a healthy double-digit potential annualized return. Shorter-term metrics like ROTCE-driven P/TBV and P/E aren’t quite as favorable, though, and I think mid-to-high $50’s is about as far as I can go on fair value by those approaches.
The Bottom Line
Hancock Whitney was an easier call earlier this year, and the stock has been rewarded for the good underlying performance of the bank. I don’t expect any sudden reversals, but I do believe 2023 will be a more challenging year, though this bank is better-placed than many to handle those challenges. I wouldn’t be in a rush to sell if I owned shares, but it’s harder to call it a “buy” now given the valuation. In borderline cases I like to go with management and/or secular trends, and I think those are generally favorable for Hancock, so I still lean favorably on these shares albeit with less near-term outperformance in my expectations.
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