Hawaii's Real Estate Risks Loom But Profitable Growth And Stable Management Could Prevail

Key Takeaways

• High real estate loan concentration in Hawaii and reliance on international visitors create risks if the market and tourism decline.
  
• Shifts toward interest-bearing deposits and rate-sensitive assets threaten net interest margins and overall profitability.
  
• Strong earnings performance and robust risk management are bolstered by increased income, solid deposit growth, stable credit quality, and improved capital levels.

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.

• The bank's high concentration in real estate loans, especially in Hawaii, may pose a risk if there is a downturn in the real estate market. This could affect future loan growth and net interest income.
  
• With an anticipated decrease in the Fed funds rate, the initial impact on net interest income could be negative due to rate-sensitive assets, affecting short-term earnings.
  
• The significant proportion of fixed-rate borrowings and assets may limit the bank's ability to take advantage of declining interest rates, which could constrain net interest margin improvements.
  
• The dependency on international visitors in the lodging sector could pose risks to credit quality if international traffic decreases, potentially impacting loan loss provisions and net margins.
  
• With the ongoing shifts in deposit mix towards higher-yielding interest-bearing deposits, there is a potential compression in net interest margins, impacting overall profitability.

Bank of Hawaii Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of Hawaii's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.2% today to 24.1% in 3 years time.
• Analysts expect earnings to reach $184.8 million (and earnings per share of $4.57) by about November 2027, up from $131.9 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 16.8x on those 2027 earnings, down from 23.4x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.56% 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

• The Bank of Hawaii reported an increase in net income and diluted earnings per share, alongside improved net interest margin and net interest income, indicating stronger earnings performance.
  
• Bank of Hawaii maintained a strong deposit market share and deposit growth, showing positive trends in revenue generation and liquidity positions.
  
• The credit quality of the loan portfolio remains strong with low non-performing assets, suggesting robust management of risk and stable net margins.
  
• The bank's capital levels improved, which could provide a buffer to absorb potential future shocks without impacting earnings significantly.
  
• Stable real estate market conditions in Hawaii and a focus on secured lending with low loan-to-value ratios highlight controlled risk exposure, potentially maintaining stable earnings and net margins.

Valuation

• The analysts have a consensus price target of $65.25 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 $74.0, and the most bearish reporting a price target of just $56.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $767.1 million, earnings will come to $184.8 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $77.77, the analyst's price target of $65.25 is 19.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.