Hope Bancorp Stock: Top-Line May Compensate Provisioning (NASDAQ:HOPE)

Earnings of Hope Bancorp, Inc. (NASDAQ:HOPE) will most probably increase this year partly due to mid-single-digit loan growth. Further, high interest rates will benefit the moderately rate-sensitive topline. On the other hand, above-average provisioning expenses will likely drag earnings. Overall, I’m expecting Hope Bancorp to report earnings of $1.73 per share for 2022, up 4% year-over-year. Compared to my last report on Hope Bancorp, I have barely changed my earnings estimate as the upward revision of the margin cancels out the revisions of the provision expense and the loan growth estimates. The year-end target price suggests a high upside from the current market price. Therefore, I’m maintaining a buy rating on Hope Bancorp.

Decent Loan Growth Likely Despite Some Headwinds

Hope Bancorp’s loan portfolio grew by only 0.8% in the first quarter of 2022, which missed my expectations. The management mentioned in the latest earnings presentation that it is cautiously optimistic about achieving high-single-digit to low-double-digit loan growth for 2022, excluding Paycheck Protection Program loans. This target appears too ambitious given the first quarter’s performance. Hope Bancorp’s historical performance also casts doubts on the management’s ability to achieve that target. The loan book has grown at a compounded annual growth rate of only 5.9% from 2017 to 2021.

However, certain economic factors indicate healthy loan demand in the coming months. The job market, which is an important determinant of loan growth and credit quality, remains strong. The country’s unemployment rate is back to the pre-pandemic level, which bodes well for loan growth. Additionally, the Conference Board’s leading economic index for the U.S. continues to be high compared to previous years, even though it has slipped through most of this year.

On the other hand, certain other economic metrics, especially the consumer confidence index, provide a reason to be cautious. Moreover, the Fed projects the fed funds rate to almost double from 1.75% to around 3.5% in the remainder of this year. Rates as high as 3.5% are sure to dampen borrowers’ credit appetite. Furthermore, the management mentioned in the latest conference call that it is already seeing some signs of stronger corporate clients pulling back from potential deals as pricing on new loans has increased.

Considering these factors, I’m expecting the loan portfolio to increase by 5.9% by the end of 2022 from the end of 2021. In my last report on Hope Bancorp, I estimated loan growth of 8.2% for 2022. I have now revised downwards my full-year loan growth estimate because of the below-expected growth in the first quarter of the year and the faster-than-expected interest rate hike that should dampen loan demand.

Meanwhile, deposits will likely grow in line with loans in the remainder of the year. The following table shows my balance sheet estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Financial Position
Net Loans	11,018	12,006	12,182	13,356	13,812	14,626
Growth of Net Loans	5.3%	9.0%	1.5%	9.6%	3.4%	5.9%
Other Earning Assets	2,231	2,316	1,868	2,486	2,853	2,825
Deposits	10,847	12,156	12,527	14,334	15,040	15,253
Borrowings and Sub-Debt	1,328	1,118	927	559	622	1,150
Common Equity	1,928	1,903	2,036	2,054	2,093	2,139
Book Value Per Share ($)	14.2	14.5	16.0	16.6	17.0	17.7
Tangible BVPS ($)	10.7	10.8	12.3	12.7	13.2	13.8
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified)

High Deposit Beta Counters Interest Income’s Rate Sensitivity

Variable-rate loans made up 43% of total loans at the end of March 2022, as mentioned in the presentation. These loans will ensure that the average earning-asset yield responds promptly to interest rate hikes. Moreover, the sizable balance of non-interest-bearing deposits will make the average deposit cost somewhat sticky, thereby helping the margin. Non-interest-bearing deposits made up a sizable 37.9% of total deposits at the end of March 2022.

However, during the last interest rate hike cycle, the deposit beta was too high, i.e. around 75%, as mentioned in the conference call. In other words, a 100-basis points rise in interest rates increased the average deposit cost by around 75 basis points during the previous cycle. The management mentioned in the conference call that it expects the deposit beta to be lower this time around.

Due to the combination of the loan portfolio’s rate sensitivity and a high deposit beta, the net interest margin is only moderately sensitive to interest rate changes. The management’s interest-rate sensitivity analysis given in the 10-Q filing shows that a 200-basis points increase in interest rates can boost the net interest income by only 5.71% over twelve months.

Considering these factors, I’m expecting the margin to increase by 20 basis points in the last nine months of 2022 from 3.21% in the first quarter of the year. In my last report on Hope Bancorp, I estimated a lower increase in the margin. I have now revised upwards my margin estimate because of recent economic releases and Federal Reserve projections.

Credit Costs Likely to Surge Amid Rising Interest Rates

Hope Bancorp reversed a large part of its previous provisioning in the first quarter of 2022, which exceeded my expectations. Going forward, provisioning reversals will likely taper off and provisioning charges will rise because of the high interest-rate environment. Some borrowers that were already stretched due to high inflation may be pushed into default if the federal funds rate goes up to 3.5%.

Overall, I’m expecting the net provision expense to make up 0.13% of total loans in 2022. In comparison, the provision expense averaged 0.11% of total loans from 2017 to 2019. In my last report on Hope Bancorp, I estimated a net provision expense of $12 million, while now I am estimating a net provision expense of $19 million for 2022. I have revised my provision expense estimate because of recent economic developments.

Expecting Earnings to Increase by 4%

The anticipated loan growth and margin expansion will likely lift earnings for this year. On the other hand, above-average provisioning for loan losses will likely restrict earnings growth. Overall, I’m expecting Hope Bancorp to report earnings of $1.73 per share in 2022, up 4% year-over-year. The following table shows my income statement estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Income Statement
Net interest income	481	488	467	467	513	563
Provision for loan losses	17	15	7	95	(12)	19
Non-interest income	66	60	50	53	44	47
Non-interest expense	267	278	283	284	293	311
Net income – Common Sh.	139	190	171	112	205	209
EPS – Diluted ($)	1.03	1.44	1.35	0.90	1.66	1.73
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified)

In my last report on Hope Bancorp, I estimated earnings of $1.72 per share. My earnings estimate is barely changed because the positive effect of the margin’s upward revision offsets the negative effects of a downward revision of the loan balance and upward revision of the provision expense.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation.

Maintaining a Buy Rating Due to a High Total Expected Return

Hope Bancorp is offering a dividend yield of 4.0% at the current quarterly dividend rate of $0.14 per share. The earnings and dividend estimates suggest a payout ratio of 32% for 2022, which is below the five-year average of 45%. Hope Bancorp has maintained its dividend per share at $0.14 per share since the second quarter of 2018. In my opinion, the below-average payout ratio for 2022 is not reason enough for the bank to break its tradition now. Therefore, I’m expecting the dividend to be maintained this year.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Hope Bancorp. The stock has traded at an average P/TB ratio of 1.12 in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	Average
T. Book Value per Share ($)	10.7	10.8	12.3	12.7	13.2
Average Market Price ($)	15.5	14.6	12.5	9.1	14.0
Historical P/TB	1.45x	1.35x	1.01x	0.71x	1.06x	1.12x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple with the forecast tangible book value per share of $13.8 gives a target price of $15.4 for the end of 2022. This price target implies a 9.4% upside from the June 28 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	0.92x	1.02x	1.12x	1.22x	1.32x
TBVPS – Dec 2021 ($)	13.8	13.8	13.8	13.8	13.8
Target Price ($)	12.6	14.0	15.4	16.8	18.1
Market Price ($)	14.1	14.1	14.1	14.1	14.1
Upside/(Downside)	(10.2)%	(0.4)%	9.4%	19.2%	29.0%
Source: Author’s Estimates

The stock has traded at an average P/E ratio of around 10.6x in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	Average
Earnings per Share ($)	1.03	1.44	1.35	0.90	1.66
Average Market Price ($)	15.5	14.6	12.5	9.1	14.0
Historical P/E	15.1x	10.1x	9.2x	10.1x	8.4x	10.6x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the forecast earnings per share of $1.73 gives a target price of $18.3 for the end of 2022. This price target implies a 30.2% upside from the June 28 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	8.6x	9.6x	10.6x	11.6x	12.6x
EPS 2022 ($)	1.73	1.73	1.73	1.73	1.73
Target Price ($)	14.8	16.6	18.3	20.0	21.7
Market Price ($)	14.1	14.1	14.1	14.1	14.1
Upside/(Downside)	5.6%	17.9%	30.2%	42.5%	54.8%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $16.8, which implies a 19.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 23.8%. Hence, I’m maintaining a buy rating on Hope Bancorp.