Investment Restructuring And $100 Million Stock Buyback To Strengthen Future Earnings

Key Takeaways

• Loan growth in commercial real estate and industrial segments may increase revenue despite potential payoffs being a challenge.
  
• Strategic deposit mix shift and pricing actions are expected to enhance net interest margin, bolstering net interest income.
  
• Economic and strategic challenges, including slow local growth, restructuring losses, and interest rate uncertainties, may hinder First Hawaiian's margins and earnings.

Catalysts

Operates as a bank holding company for First Hawaiian Bank that provides a range of banking products and services to consumer and commercial customers in the United States.

• First Hawaiian Bank executed an investment portfolio restructuring to increase yields, expected to enhance net interest income by $8.6 million and net interest margin by 4 basis points in 2025, positively impacting earnings.
  
• Loan growth driven by commercial real estate (CRE) and commercial and industrial (C&I) segments is projected for 2025, potentially boosting revenue, though payoffs in the CRE and construction portfolios may be a headwind.
  
• A favorable deposit mix shift and strategic pricing actions have already expanded the net interest margin (NIM) by 8 basis points, with further NIM expansion expected throughout 2025, positively affecting net interest income.
  
• Continued strong deposit performance, aided by effective customer engagement and technology investments, is expected to support balance sheet growth and reduce reliance on higher-cost funding, thereby improving net margins.
  
• A significant stock buyback authorization of $100 million for 2025 may enhance earnings per share (EPS) by reducing the number of shares outstanding, assuming opportunistic execution throughout the year.

First Hawaiian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Hawaiian's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.0% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $259.1 million (and earnings per share of $2.15) by about March 2028, up from $230.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, up from 13.4x today. This future PE is greater than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to decline by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

First Hawaiian Future Earnings Per Share Growth

Risks

• The local economy in Hawaii is expanding at a slow pace, with a slight decrease in visitor arrivals and spending, which could negatively impact revenue growth for the bank.
  
• Expected continued payoffs in the CRE and construction portfolios are seen as a headwind, likely affecting net interest margins and earnings as loan growth may be offset by these payoffs.
  
• A $26.2 million pretax loss was recognized due to securities restructuring, impacting the income statement and potentially depressing net margins and earnings in the short term.
  
• Commentary around potential slowdowns in customer demand for loans and considerable early refinances could limit loan portfolio growth, which is crucial for maintaining net interest income and overall earnings.
  
• While proactive management strategies are in place, potential uncertainties around the interest rate environment and deposit costs could impact net margins unfavorably if rates do not trend as expected.

Valuation

• The analysts have a consensus price target of $28.5 for First Hawaiian based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $31.0, and the most bearish reporting a price target of just $24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $967.2 million, earnings will come to $259.1 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 6.2%.
• Given the current share price of $24.46, the analyst price target of $28.5 is 14.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.