BOH - Bank Of Hawaii: Quality Metrics Hold Up Despite Maui Tragedy

2023-10-23 12:04:31 ET

Summary

• Bank of Hawaii Corporation's Q3 performance showed higher revenues and an earnings beat, indicating margin strength and controlled expenses.
• Provisions for credit losses decreased, suggesting that exposure to the wildfires in Maui may not be as bad as feared.
• The bank saw strong non-interest income and operational efficiency, with credit quality metrics remaining strong.
• Get paid handsomely to wait with Bank of Hawaii Corporation stock.

This morning we are revisiting Bank of Hawaii Corporation (NYSE: BOH ), a bank that serves customers in the Hawaiian Islands market. This bank shares similar risks to all other regional banks that we have been covering. Namely, the need to pay more for customer deposits in the way of interest, and the risk of cooling loan demand amid an uncertain economy.

Margins have indeed been pressured in the sector. However, our coverage suggests that for the most part, loan demand is holding up, and margins should be troughing as future loans will be at higher yields, while the cost of funds is likely nearing a peak. The Bank of Hawaii has many customers in an economy that relies on tourism. Tourism and travel has been strong in recent quarters, having, of course, rebounded from COVID. However, a new risk was the wildfires in Maui.

It is unclear how much exposure the bank has to Maui, or its clients, though the company has indicated it is committed to helping its Maui customers. This is a risk to keep in mind, but so far, those natural events did not lead to a drastic decline in earnings. Asset quality metrics continue to hold up despite the tragedy there.

The company just reported mixed earnings , and the stock is rallying. We also love the dividend yield of 6.1% here. Overall, Q3 metrics were mixed, but we continue to rate shares a buy for the long-term, and you can collect the dividend to wait.

Bank of Hawaii Q3 headline performance and provisions for losses

BOH stock also offers a decent valuation, on top of the nice yield. The bank reported net revenues of $171.63 million in Q3 2023. This was a beat versus consensus expectations of $11 million , and it was about flat from last year's quarter, and up from the sequential Q2. The higher revenue number also contributed to an earnings beat. Both of these metrics imply there was margin strength and well-controlled expenses.

Now that said, and with the wildfires in Maui, we did see provisions for credit losses. Of course, generally speaking, banks are preparing for some delinquencies in this climate. However, overall asset quality remained strong during the third quarter of 2023. Provision for credit losses for the third quarter of 2023 was $2.0 million compared with $2.5 million in the previous quarter, so it was down. This implies exposure to Maui may not be as bad as many were concerned with.

We also saw strong non-interest income. Many banks are seeing a decline on this source of revenue. Noninterest income was $50.3 million in the third quarter of 2023, an increase of 16.4% from the sequential quarter and an increase of 64.2% from Q3 2022. Although if you make adjustments for some tax credit sales, some investment securities losses, and a pre-tax charge for some asset sales, the adjusted non interest income was up 6.6% from last year.

What about net interest margin? This has been our key focus for regional banks? Well, the pressure remains. Net interest income was $120.9 million, a decrease of 2.7% from the sequential quarter and a decrease of 14.6% from a year. This is not very surprising and mimics much of what we have seen in regional banks. The decrease was due to higher funding costs on deposits but this was partially offset by higher earning asset yields. Overall net interest margin was 2.13% a decrease of 9 basis points from the sequential quarter and 47 basis points from a year ago.

Moving forward, we expect a trough in BOH margins, as the cost of funds is likely peaking, while yields on assets continue to increase. How about loan and deposit growth?

Loan and deposit growth

For the many regional banks we have covered, we are largely seeing light loan growth, as well as slight declines in deposits, on average. Bank of Hawaii saw similar trends. From the sequential Q2, loans were about flat while deposits edged higher. This is welcome news at a time where we had concerns over Maui. Deposits were $20.8 billion, an increase of 1.4% from Q%. The total loans were $13.9 billion, flat from Q2. Of course, with less provisions, but higher revenues, and slightly lower margins, the earnings beat estimates. This means operational efficiency was strong.

Operational efficiency in Q3

The return on average assets was 0.78%, of course down from 0.91% in Q3 2022, but rising from the sequential Q2's 0.77%. Further, the return on equity was 15.28%, down from 16.98% last year as expected, but rose nicely from Q2 2023's 14.95%. The efficiency ratio was 61.66%, rising from 61.37% last year as well which is a positive. We also want to point out that credit quality metrics remain strong. We saw net charge-offs fall of just 0.06% of annualized outstanding loans, which is quite low. Total non-performing assets were just $11.5 million, flat from the sequential quarter, and actually down $2.3 million from a year ago. Non-performing assets as a percentage of total loans were 0.08% at the end of the quarter, flat from Q2 and a decrease of 2 basis points from the same quarter of 2022.

So, to see improvement year-over-year, with everything happening with yields, loan demand, and tragedy in Maui, the bank is holding up.

Take home

This was a pretty solid quarter for Bank of Hawaii, especially considering we had wildfires in Maui. It remains unclear how much exposure the bank does have there, but the fact that loan loss provisions declined from last quarter was strong, while the bank remains efficient. We believe that Bank of Hawaii Corporation margins are close to troughing, while the asset quality metrics are strong. With a strong 6.1% yield to be paid to wait, we continue to think the stock is a buy here for future returns to growth.

For further details see: