Low Cost Deposits And Hawaii Advantage Will Support Future Success

Key Takeaways

• Bank of Hawaii's emphasis on managing deposits and repricing loans could enhance margins and income even with changing market rates.
  
• Solid credit performance, coupled with effective cost management and favorable market conditions, bolsters potential for improved profitability and sustained revenue growth.
  
• Economic and market uncertainties, including interest rates and tourism, pose risks to revenue growth, deposit costs, and overall earnings.

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’s strategic focus on managing low-cost deposits and repricing time deposits could enhance net interest margins, potentially increasing future net interest income.
  
• The solid credit performance and low-risk loan portfolio, predominantly secured by real estate with low loan-to-value ratios, can lead to lower credit losses and improve net margins.
  
• Continued strong market position in Hawaii with stable economic and real estate conditions can help in sustaining and potentially increasing revenue growth in commercial and consumer loans.
  
• Incremental improvements in net interest income driven by fixed and adjustable asset cash flow repricing at current market rates, could positively impact earnings, particularly in a declining or stable rate environment.
  
• Strategic cost management, including initiatives to reduce expenses and investments in revenue-enhancing areas, is expected to control expense growth, potentially improving net margins and overall profitability.

Bank of Hawaii Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Hawaii's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.1% today to 35.1% in 3 years time.
• Analysts expect earnings to reach $267.3 million (and earnings per share of $6.43) by about April 2028, up from $141.6 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 12.3x on those 2028 earnings, down from 18.8x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.1% 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.

Bank of Hawaii Future Earnings Per Share Growth

Risks

• Economic conditions in Hawaii, while currently stable, could be negatively impacted by external factors such as tariffs and volatility in the tourism market, potentially affecting future revenue growth.
  
• The prospect of interest rate changes remains unpredictable, with potential rate cuts being a positive factor but rate hikes possibly increasing deposit costs and squeezing net interest margins.
  
• Market volatility and uncertainty continue to pressure noninterest income, particularly affecting trust services revenue and could impact overall earnings.
  
• Deposit growth strategy focusing on maintaining low-cost deposits poses a risk; failure to retain these could raise funding costs and impact net interest margins.
  
• Loan growth is partially dependent on commercial pipelines and economic conditions, both of which are subject to caution and could impact revenue if economic uncertainties lead to reduced lending opportunities.

Valuation

• The analysts have a consensus price target of $70.333 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 $80.0, and the most bearish reporting a price target of just $59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $761.8 million, earnings will come to $267.3 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of $66.79, the analyst price target of $70.33 is 5.0% 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.