Expansion Into South Korea And Digital Investments Will Improve Bank's Profitability

Key Takeaways

• Expansion in South Korea and focus on diverse lending drive potential revenue and earnings growth.
  
• Digital system investments and strategic loan sales are expected to enhance profitability and operational efficiency.
  
• Local fires, loan payoff constraints, competitive deposit market, and inflation-driven expenses challenge Hanmi's revenue growth and earnings stability.

Catalysts

Operates as the holding company for Hanmi Bank that provides business banking products and services in the United States.

• Expansion of the Corporate Korea initiative, including the opening of a new office in Seoul, South Korea, is expected to enhance client relationships and attract more business, potentially boosting revenue through increased loan production and related services.
  
• The bank's focus on growing and diversifying its C&I (Commercial and Industrial) loan portfolio, as seen with a 23% increase in USKC loans, is likely to drive future earnings growth by increasing interest income and noninterest-bearing deposits.
  
• Efforts to optimize the branch network through consolidations and the opening of new branches are anticipated to result in cost savings and improved operational efficiencies, ultimately supporting net margins.
  
• Investments in digital systems, such as new loan origination and online account opening systems, are projected to drive operational efficiencies and improve profitability over time, positively impacting earnings.
  
• The bank's strategy to continue selling residential mortgage and SBA loans in the secondary market is expected to strengthen the balance sheet, which could support future growth and improve net margins.

Hanmi Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hanmi Financial's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.9% today to 27.7% in 3 years time.
• Analysts expect earnings to reach $81.7 million (and earnings per share of $2.72) by about January 2028, up from $62.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $62 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 11.0x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.45%, as per the Simply Wall St company report.

Hanmi Financial Future Earnings Per Share Growth

Risks

• The potential impact of the devastating fires in Los Angeles could indirectly affect Hanmi's local operations and community investments, potentially stressing their revenue base in their primary market.
  
• Despite setting targets for loan growth, the current uncertainty and increased payoffs might constrain their net loan portfolio growth, impacting future earnings projections.
  
• Hanmi's reduced noninterest income in Q4 indicates reliance on one-time gains, and without consistent noninterest income growth, this could negatively affect earnings stability.
  
• A highly competitive deposit market might pressure net interest margin as they avoid being the pricing leader; failure to attract deposits could limit revenue generation capabilities.
  
• Continued elevated levels of inflation could maintain upward pressure on expenses, particularly salaries and benefits, which might limit improvements in net margins if not offset by revenue growth.

Valuation

• The analysts have a consensus price target of $27.0 for Hanmi Financial 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 $21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $295.0 million, earnings will come to $81.7 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $22.89, the analyst's price target of $27.0 is 15.2% 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.