Earnings Improvement And Market Resilience Will Sustain Long-Term Demand

Key Takeaways

• Expanding population, tourism, and digital banking adoption are driving stronger loan demand, operational efficiency, and improved margins.
  
• Conservative risk management and sustainable finance initiatives are supporting asset quality, resilience, and new growth opportunities.
  
• Geographic concentration, deposit outflows, stagnant loan growth, rising competition, and increasing credit risk threaten long-term stability, earnings, and asset quality.

Catalysts

Operates as a bank holding company for First Hawaiian Bank that provides a range of banking products and services to consumer and commercial customers in the United States.

• The ongoing expansion in Hawaii's population and consistently rising tourism spending are supporting stable to growing demand for loans and banking services, which should lead to gradually increasing loan balances and higher fee-based revenue over time.
  
• Strategic investments and progress in digital banking adoption are enabling First Hawaiian to maintain expense discipline, streamline operations, and attract and retain younger customers, which will likely support margin improvement and cost-to-income ratio reduction.
  
• The bank's robust deposit franchise, underpinned by a strong local brand and deep customer relationships, has allowed for stable deposit growth and maintained a high proportion of noninterest-bearing deposits-putting First Hawaiian in a favorable position to benefit from net interest margin expansion as interest rates normalize.
  
• Continued focus on conservative underwriting and close management of credit risk is resulting in superior asset quality and minimal loan losses, contributing to more resilient future earnings even through credit cycles.
  
• Efforts in sustainable finance and green lending position First Hawaiian to capture new business opportunities as local businesses and governments invest in environmentally sustainable infrastructure, creating new revenue streams and enhancing long-term fee income.

First Hawaiian Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming First Hawaiian's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.8% today to 29.2% in 3 years time.
• Analysts expect earnings to reach $288.7 million (and earnings per share of $2.53) by about April 2029, up from $284.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 12.8x on those 2029 earnings, up from 11.3x today. This future PE is greater than the current PE for the US Banks industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 3.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

• Continued declines in commercial and retail deposits, as noted in the quarter, could become a longer-term trend if customer preferences shift toward fintechs or online banks, potentially impacting stable funding sources and compressing net interest margins and earnings.
  
• Persistent reliance on the Hawaiian regional economy, with repeated references to local economic factors and the management's reluctance to forecast long-term growth, highlights geographic concentration risk that could expose revenue and earnings to tourism slowdowns, demographic shifts, or regional downturns.
  
• The reduction in loan growth guidance from low
• to mid-single digits down to low single digits, as well as construction loan paydowns and stabilization (rather than growth) of key loan portfolios, could signal a maturing or stagnating balance sheet, limiting long-term revenue and earnings expansion.
  
• Increasing competition for construction loan takeouts from institutional buyers and insurance companies may result in more loans being refinanced away from First Hawaiian, reducing loan balances and associated interest income over time.
  
• The CFO's comments on persistent, albeit small, increases in nonperforming residential loans and consumer financial strain suggest rising credit risk at the lower end of the market, which, if it becomes a structural issue, may lead to higher loan losses and negatively impact net income and asset quality.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $27.33 for First Hawaiian 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 $31.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $990.2 million, earnings will come to $288.7 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $26.41, the analyst price target of $27.33 is 3.4% 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.