Asset Reinvestment At Higher Yields Will Provide Resilience Against Rate Fluctuations

Key Takeaways

• Improved net interest income and margin expected from repricing assets, lower deposit costs, and reinvestment at higher yields, boosting earnings.
  
• Low-risk loan portfolio and credit quality sustain stability, while commercial and wealth initiatives drive additional revenue growth.
  
• Economic uncertainty, geographic concentration, and interest rate fluctuations pose risks to Bank of Hawaii's earnings and growth amidst rising expenses.

Catalysts

Operates as the bank holding company for Bank of Hawaii that provides various financial products and services in Hawaii, Guam, and other Pacific Islands.

• Bank of Hawaii is anticipating continued improvement in net interest income and net interest margin due to the cumulative impact of asset cash flow repricing and decreasing deposit remix costs, which are expected to incrementally grow both metrics over the next several years. This is likely to positively impact earnings.
  
• The bank's ability to decrease deposit funding costs, coupled with the maturity of a significant portion of higher-cost time deposits in the next year, presents a margin improvement opportunity as these funds can be replaced at lower rates. This is likely to boost net margins.
  
• Bank of Hawaii has successfully maintained a low-risk loan portfolio with strong credit quality and low loan-to-value ratios, which supports stable earnings against economic fluctuations. This sustains net margins and mitigates potential credit losses.
  
• The planned revenue-enhancing initiatives in the commercial and wealth areas are expected to augment income streams and provide additional growth in revenues beyond organic loan and deposit growth.
  
• The significant amount of fixed rate asset cash flow being reinvested at higher yields is expected to continue, benefiting net interest income and providing resilience in case of interest rate fluctuations in the market, thereby positively impacting earnings.

Bank of Hawaii Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Hawaii's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.9% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $218.1 million (and earnings per share of $5.44) by about January 2028, up from $137.4 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 15.9x on those 2028 earnings, down from 21.8x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.31% 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.

Bank of Hawaii Future Earnings Per Share Growth

Risks

• Economic uncertainty, as indicated by the CEO's cautious outlook on capital returns, suggests potential challenges that could impact future earnings.
  
• The credit quality, though currently strong, may be at risk if economic conditions worsen, which could affect the bank's provisions and net income.
  
• The reliance on the Hawaiian market, while currently stable, exposes the bank to risks specific to that geographic area, potentially affecting revenue if there is an economic downturn in that region.
  
• Changes in interest rates, especially if unexpected, could impact the bank's net interest margin and earnings negatively if not managed correctly.
  
• Expense projections include increased spending in revenue-enhancing initiatives, which, if not successful, could increase costs and impact net margins.

Valuation

• The analysts have a consensus price target of $73.17 for Bank of Hawaii 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 $90.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $814.0 million, earnings will come to $218.1 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $75.47, the analyst's price target of $73.17 is 3.1% lower. 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.