Pending Merger With Territorial Bancorp Will Deliver Cost Synergies And Operational Efficiencies

Key Takeaways

• The pending merger with Territorial Bancorp and enhanced deposit strategies are expected to boost net interest income and net margins.
  
• Strategic focus on organic loan growth and cost management should drive revenue growth and support future earnings.
  
• Transaction contingent on regulatory approvals introduces uncertainty, while competitive pricing and increased expenses pressure profitability and credit quality challenges persist amidst local economic risks.

Catalysts

Operates as the bank holding company for Bank of Hope that provides retail and commercial banking services for businesses and individuals in the United States.

• The pending merger with Territorial Bancorp is expected to enhance earnings growth and profitability, primarily through the addition of low-cost core deposits and high-quality residential mortgage loans, which should positively impact net interest income.
  
• The focus on organic loan growth and a strong fee income trajectory are anticipated to drive revenue growth in the high single-digit percentage range, outpacing loan growth and supporting future earnings.
  
• The management's strategy to improve the deposit mix by reducing brokered deposits and controlling deposit costs could lead to an expanding net interest margin over time, supporting net interest income.
  
• Realization of cost synergies and operational efficiencies from the Territorial Bancorp merger, despite a longer integration period, are expected to contribute to a targeted efficiency ratio of approximately 50%, thereby enhancing net margins.
  
• The strategic investments in talent and technology, along with disciplined expense management, are anticipated to support franchise growth while containing noninterest expenses, positively affecting net margins and overall earnings.

Hope Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hope Bancorp's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.8% today to 31.1% in 3 years time.
• Analysts expect earnings to reach $208.7 million (and earnings per share of $1.58) by about January 2028, up from $99.6 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 10.3x on those 2028 earnings, down from 14.2x 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 grow by 2.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Hope Bancorp Future Earnings Per Share Growth

Risks

• The closing of the pending transaction between Hope Bancorp and Territorial Bancorp is contingent upon regulatory approvals, introducing potential uncertainty and risk that could affect future profitability and operational integration. (Earnings impact)
  
• A competitive deposit pricing environment continues to exert pressure on funding costs, which may impact net interest margins and overall profitability if not managed effectively. (Net margins impact)
  
• Expenses are expected to increase in the low double-digit range year-over-year, which could strain profitability if revenue growth does not keep pace. (Net margins impact)
  
• Nonperforming assets were reported at $91 million, and despite a decrease, charge-offs have been elevated, potentially signaling ongoing credit quality issues that could necessitate higher provisioning in the future. (Earnings impact)
  
• The impact of wildfires in the Greater Los Angeles area could present risks to the stability of local economic conditions, affecting revenue growth and the performance of the loan portfolio. (Revenue impact)

Valuation

• The analysts have a consensus price target of $13.8 for Hope Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $670.2 million, earnings will come to $208.7 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $11.71, the analyst's price target of $13.8 is 15.1% 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.