2023-08-07 03:41:38 ET
Summary
- First Hawaiian stock remains depressed despite a partial recovery, with shares still down 24.4% from pre-crisis levels.
- FHB has shown growth in net interest income and net income, aided by higher interest rates, but this doesn't make it appealing.
- Concerns include uninsured deposits and the fact that shares are trading at a premium compared to their book value per share. A 'hold' rating is recommended.
Even though the banking crisis that broke out in early March of this year seems to be a distant memory, many of the companies that were affected by the downturn but that ultimately survived have yet to see a full recovery. This is in spite of the fact that the broader market continues to appreciate. One of the firms that remains severely depressed from a share price perspective is First Hawaiian ( FHB ). At the low point, shares were down as much as 44.9% compared to where they were at the end of February of this year. But even after staging a partial recovery, the stock is still down 24.4%. In the long run, I suspect that the firm will do fine. But when you look at its current financial condition, I understand why the stock has not yet recovered entirely. In fact, given the situation as it is, I would argue that a good rating for the company at this moment is a 'hold' to reflect my view that, even though the stock remains depressed, share price performance from here will likely be more or less in alignment with what the broader market experiences.
A concentrated bank
I don't think I need to tell you where First Hawaiian was founded. Its name gives it away. What is interesting about the company is that it's actually far older than the state in which it's in. Hawaii didn't become a state until 1959. Our prospect is more than 100 years older they are that, having been founded back in 1858 as the first successful banking partnership located in what was then the Kingdom of Hawaii. In fact, it boasts the distinction of being the second oldest bank formed West of the Mississippi River. From those humble roots, the firm has grown into a rather sizable outfit. As of this writing, the company has a market capitalization of about $2.7 billion.
This size has only been achievable by growing the types of offerings that the company can provide to its depositors and other customers. Through its 51 branches, 46 of which are in Hawaii, three of which are in Guam, and two of which are in Saipan, the company provides its customers with deposit products, various loans, and even wealth management services centered around things like private banking, investment management, and more. It even offers customers, both consumers and commercial firms, with credit cards and merchant processing services.
Over the past few years, management has done a good job growing the company's top and bottom lines. Net interest income, for instance, expanded from $414 million in 2020 to $612.2 million in 2022. Non-interest income actually declined during this time from $197.4 million to $179.5 million. But that didn't stop net income from jumping from $185.8 million to $265.7 million. Growth on both the top and bottom lines has continued into the 2023 fiscal year . During the first half of the year, net interest income totaled $313.4 million. That's up nicely from the $283.8 million reported one year earlier. Fortunately, non-interest income experienced a turnaround, with the metric climbing from $85.5 million to $96.4 million over this window of time. Both of these have enabled net income to grow from $117.1 million to $129.3 million.
This kind of growth has definitely been aided by higher interest rates. This has pushed the net interest margin for the company up slightly. Even though we did see a decrease from the first quarter of this year to the second quarter, for the first half of the year the net interest margin for the company totaled 3.01%. That's up from the 2.51% reported one year earlier. The bigger driver behind its growth, however, was an expansion in the overall assets on the company's books. From 2020 through 2022, the value of deposits on the firm's books expanded from $19.23 billion to $21.69 billion. This allowed loans to grow from $13.28 billion to $14.09 billion. Meanwhile, securities, including both those that are available for sale and held to maturity, increased from $6.07 billion to $7.47 billion.
Now, it is important to note that the picture for both deposits and loans has changed somewhat. Even though First Hawaiian did not have the kind of exposure to California like the banks that experienced the greatest pain did, it did still suffer from the fallout. The overall value of loans increased to $14.36 billion by the end of the second quarter, but deposits dipped to $21.08 billion. That's a decline of $610.8 million over the course of six months. Even though the company lacked a lot of the exposure that market participants feared, it did have its own issues. For instance, even today, a large portion of its overall deposits are uninsured. By the end of the second quarter, this came out to 51% of all deposits. Though if you include collateralized deposits in the mix, this number does drop some to 40%. While not as high as some that I have seen, this is not an insignificant amount of exposure. The good news at least is that management has not needed to take on a significant amount of debt to compensate for withdrawals. Although deposits did decline as I mentioned already, the firm went from having only $75 million in debt at the end of 2022 to having a very modest $500 million worth of debt today. It also boasts $9.1 billion worth of liquidity that it can tap into should it need it.
While the deposit picture is the most important aspect for the company right now, another area that investors have been worried about has been the exposure that some banks have to office properties. There are high vacancy rates in office properties across the country as I have written about in prior articles. The fear is that, as leases expire, many of these properties might sit vacant, resulting in defaults that could negatively affect the banks that have the greatest exposure to them. The good news is that this is not much of a concern as far as First Hawaiian is involved. It is true that about $5.2 billion worth of the company's loan portfolio is in the form of commercial real estate and construction assets. However, office properties account for only 18.6% of all commercial real estate, which translates to just 5.6% of total loans and leases under the commercial real estate category. The firm does have another chunk of office exposure in the form of construction loans, but the total amount there should be about $73 million, which is immaterial to the business. For context, the second largest category when it comes to loan exposure is to residential assets. That totals about $4.3 billion. Commercial and industrial loans are a distant third at $2.2 billion.
The last thing I would like to touch on is valuation for the company. With a price to earnings multiple, using data from 2022, of 10.3, the firm is not expensive. But it's also not as cheap as some of the other banks that I have seen. Some of them have multiples ranging between 6 and 9. And of those, some have a lower portion of their deposits classified as uninsured. With shares trading at $20.69 apiece, the company is also trading at a premium to its book value of $18.49 per share and it's trading well above its tangible book value of $10.69 per share. This is not necessarily an indication that the bank is overvalued. But again, there are other players in the space that are trading cheaper than this.
Takeaway
All things considered, I would make the case that while First Hawaiian seems to be a perfectly fine institution that has held up reasonably well in the current environment, I do believe that it's far from being a best of breed prospect. Management has achieved attractive growth in recent years. But the bank does still have a meaningful amount of its deposits classified as uninsured, while also trading levels at, while far from bad, aren't impressive. Given these factors, I feel comfortable giving the company nothing better than a 'hold' rating at this time.
For further details see:
First Hawaiian: A Solid Bank, But Not A Great Prospect