Our Findings Indicate Lower Deposit Costs Will Secure Resilient NIM

Key Takeaways

• Effective deposit and asset management strategies enhance the bank's net interest income and margin, supporting growth amidst rate cuts and economic uncertainty.
  
• Strong credit quality and strategic stock repurchases position the bank for earnings stability and potential shareholder value increase.
  
• Economic uncertainty in Hawaii, declining loan growth, and increased reserves signal potential revenue pressure and credit loss concerns for First Hawaiian.

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.

• The bank has managed to successfully lower its deposit costs, which contributed to an improved net interest margin (NIM). Expectations for further rate cuts in coming quarters suggest additional potential for decreasing deposit costs, potentially supporting future NIM and net interest income growth.
  
• Retail deposits grew by $105 million in the quarter, showcasing strong customer retention and account growth. This increase in stable, low-cost deposits could positively impact net interest income by providing a robust funding base for future lending.
  
• A strategic investment portfolio restructuring that occurred in Q4 has begun to benefit the bank, providing a cushion for net interest income despite fluctuations in loan yields. This points to continued opportunities for earnings growth and NIM support from effective asset management.
  
• The bank's credit quality remained excellent, and with an increase in reserves to address economic uncertainty, it is well-positioned to manage future risk exposure. This prudent risk management could bolster earnings stability amidst economic fluctuations.
  
• The company's $75 million remaining authorization under its 2025 stock repurchase plan suggests potential for increased shareholder value through buybacks, which may drive earnings per share (EPS) growth if executed opportunistically.

First Hawaiian Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Hawaiian's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.0% today to 26.5% in 3 years time.
• Analysts expect earnings to reach $257.0 million (and earnings per share of $2.15) by about April 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 15.1x on those 2028 earnings, up from 12.8x today. This future PE is greater than the current PE for the US Banks industry at 10.7x.
• 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

• Uncertainty in the Hawaii economy due to weaker international arrivals and unclear consumer confidence could impact future revenue growth.
  
• Decline in commercial real estate loans and fluctuations in dealer flooring may negatively affect loan growth and consequently reduce interest income.
  
• Slight decline in total deposits, particularly from commercial accounts, could pressure net interest income if not offset by increased retail deposits.
  
• Impact of tariffs and increased costs on local businesses, especially in construction and car dealership sectors, may affect loan demand and the bank’s credit portfolio quality.
  
• Increased reserves due to macroeconomic uncertainty suggest concerns about future credit losses, which might narrow net margins if defaults rise.

Valuation

• The analysts have a consensus price target of $26.5 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 $30.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $969.0 million, earnings will come to $257.0 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $23.29, the analyst price target of $26.5 is 12.1% 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.