Pending Merger With Territorial Bancorp Will Expand Market Presence And Strengthen Client Relationships

Key Takeaways

• The merger with Territorial Bancorp is anticipated to enhance market share and client relationships, boosting revenue and earnings.
  
• Strong core deposit growth and proactive asset management improve stability and profitability, supporting net interest margins and reducing credit costs.
  
• Criticized loans and asset quality issues, along with declining net interest margins and challenges with investment yields, pose significant risks to Hope Bancorp's profitability and earnings stability.

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.

• Hope Bancorp's pending merger with Territorial Bancorp is a catalyst for future growth, expected to enhance market share and expand client relationships, positively impacting revenue and earnings.
  
• The company's strong core deposit growth and reduced reliance on brokered deposits improve stability and cost efficiency, supporting future net interest margin and profitability.
  
• The positive trends in loan growth, particularly in residential mortgage and commercial loans, signal potential revenue increases as loan demand improves in the coming year.
  
• Stable asset quality and proactive management of nonperforming assets, with expected favorable resolutions, suggest potential improvements in net margins through controlled credit costs.
  
• Deposit cost management and strategic reduction of average deposit costs are expected to bolster net interest income by improving the net interest margin over time.

Hope Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hope Bancorp's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.0% today to 31.7% in 3 years time.
• Analysts expect earnings to reach $216.2 million (and earnings per share of $1.65) by about December 2027, up from $101.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2027 earnings, down from 15.4x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 2.85% 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 pending acquisition of Territorial Bancorp is subject to regulatory and stockholder approvals and customary closing conditions, introducing a risk to the expected merger benefits, potentially affecting future revenue and earnings.
  
• The decline in net interest margin by 7 basis points quarter-over-quarter to 2.55% indicates pressure on profitability, primarily due to increased interest expenses, which could negatively impact net margins.
  
• The placement of a commercial real estate relationship on nonaccrual status due to loan maturity may signal potential asset quality issues, despite the minimal expected loss, posing risks to earnings stability.
  
• Criticized loans increased by $58 million quarter-over-quarter, with an increase in substandard loans, suggesting potential credit quality deterioration that could lead to higher provisions and affect net income.
  
• The restructuring and gradual repositioning of low-yield investment securities could lead to challenges in managing investment yields, impacting net interest income and overall financial performance.

Valuation

• The analysts have a consensus price target of $14.0 for Hope Bancorp 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 $15.5, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $681.8 million, earnings will come to $216.2 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $12.95, the analyst's price target of $14.0 is 7.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.