Hawaii's Strengthening Economy Will Open New Banking Opportunities In 2025

Key Takeaways

• Strategic investment portfolio repositioning and positive loan growth in commercial sectors expected to enhance future revenue and earnings.
  
• Favorable deposit mix, Hawaii's economic strength, and share repurchase initiatives indicate confidence in future growth and earnings potential.
  
• Credit risk management challenges and portfolio repositioning pressures are impacting margins, with potential volatility in credit costs and unsuccessful fintech investments affecting earnings.

Catalysts

Operates as the bank holding company for Central Pacific Bank that provides a range of commercial banking products and services to businesses, professionals, and individuals in the United States.

• The bank’s investment portfolio repositioning is expected to result in income accretion with a projected increase in net interest income by $2.7 million annually, positively impacting future revenue and earnings.
  
• Positive loan growth outlook in 2025, especially in the commercial and commercial real estate segments, alongside an increase in the loan pipeline is expected to boost revenues.
  
• Optimism about continued core deposit growth and a favorable shift in deposit mix, which could further decrease funding costs and improve net interest margins.
  
• Strengthening of Hawaii's economy, with an expected increase in construction and tourism sectors, is likely to provide further growth opportunities for the bank, thereby enhancing revenue prospects.
  
• Implementation of a new share repurchase program authorization for up to $30 million and increased dividends demonstrate confidence in future earnings and could drive earnings per share growth.

Central Pacific Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Central Pacific Financial's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.2% today to 30.0% in 3 years time.
• Analysts expect earnings to reach $101.0 million (and earnings per share of $3.68) by about March 2028, up from $53.4 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 10.2x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.09% 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.

Central Pacific Financial Future Earnings Per Share Growth

Risks

• The investment portfolio repositioning resulted in a pretax loss of $9.9 million, impacting current quarter results, although it is expected to improve future income. This negative impact could still pressure net earnings in the short term.
  
• Net charge-offs increased due to specific C&I segment losses totaling $600,000, suggesting potential volatility and risk in credit costs that could affect net margins.
  
• Consumer trends have shown past issues with the 2022 vintage, which contributed to higher loss levels previously. Although improving, residual risk in consumer portfolios may continue to affect earnings and net margins.
  
• The company's expenses included a $1.4 million impairment charge on intangible assets related to its Swell Fintech apps, indicating potentially unsuccessful investments that could impact net income.
  
• The allowance for credit loss remained significant at $59.2 million, or 1.11% of outstanding loans, indicating ongoing credit risk management that could limit net margins and overall profitability.

Valuation

• The analysts have a consensus price target of $32.0 for Central Pacific Financial 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 $337.3 million, earnings will come to $101.0 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $26.51, the analyst price target of $32.0 is 17.2% 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.