2023-11-02 08:37:35 ET
Summary
- First Hawaiian beat expectations with higher-than-expected EPS and revenue in its recent quarterly report.
- The bank's loans and securities portfolio showed mixed results, with growth in some segments but a decline in residential loans.
- The bank is optimistic about future growth drivers, including variable-rate loans, maturing fixed-rate loans, and opportunities in the securities portfolio.
First Hawaiian ( FHB ) is a bank holding company headquartered in Honolulu, Hawaii. Its main subsidiary, First Hawaiian Bank, was founded back in 1858 and is the oldest and largest financial institution in Hawaii.
A few days ago Q3 2023 was released and both EPS and revenue estimates were beaten.
- Normalized EPS was $0.46, $0.03 higher than expectations.
- Revenues were $157.15 million, $4.93 million more than expectations.
Overall this was a quarter with few surprises, as profitability is still struggling and unrealized losses are weighing heavily. Regardless, there are early signs of recovery.
Loans and securities portfolio
Total loans and leases are up about $600 million year-over-year but down $30.50 million quarter-over-quarter. The CRE & Construction segment remains the one with the largest weight, about 37 percent of total loans, and has grown by about $400 million year-over-year. In second place we have the Residential segment, which has a weight of 30 percent of total loans. The latter, unlike the former, on a year-over-year and quarter-over-quarter basis showed no growth.
It is clear that current interest rates are discouraging the purchase of homes to live in. After all, based on the last 20 years, it is one of the most expensive times to do so.
So, as CEO Robert Harrison also explained during the conference call, the stalling of growth -particularly in the Residential segment- doesn't stem from the bank's reluctance to lend money, but from demand that has weakened compared to the past.
We're still very interested in doing loans that we feel makes sense for us, and we can support our customers. So it's not us slowing down for sure, but we have seen a softening in demand. And so I think that's what it is. We had thought that there would be higher floor plan balances and they were down marginally, but the strike has created uncertainty as well. Hopefully, that's been resolved. But those -- the loan demand does seem to be softer. Certainly, in the consumer side with residential down dramatically. HELOC has softened a bit. So it's much more demand driven than supply driven for us.
By the way, the LTD ratio is only 67 percent, and compared to the previous quarter, cash on hand has more than doubled to $1.21 billion. So, the funds to originate new loans are there, but it is the demand that is in short supply, especially from retail customers.
Deposits and net interest margin
Total deposits increased by $433.33 million, reaching $21.50 billion. Most of this growth should be attributed to commercial deposits, up $239 million.
The migration from non-interest-bearing deposits to interest-bearing deposits continues; however, it appears that the trend is gradually slowing down. To date, the total cost of deposits is 1.40%, 29 basis points higher than the previous quarter.
Logically, with the cost of deposits rising and sluggish demand for loans, net interest income and net interest margin could only fall. However, on an annual basis the drop was not as drastic as in the case of some peers, only 7 basis points. But there is more.
For CFO James Moses , the worst may be behind us; in fact, one last deterioration is expected in Q4 2023 and then profitability is expected to rebound in Q1 2024.
I think there's a lot less headwinds than we've seen. We're seeing the pace of change slow down dramatically. We would expect that first quarter again, right, in flat rates, we're expecting a trough here in Q4. And then we would actually expect to start to see the NIM grind two, three basis points higher, again, right, given flat interest rates at this point in time. So we're encouraged by the stability of the deposit base, and we're encouraged with the dynamics that we see, but more recently relative to earlier in the year. So I think it's a generally pretty stable and good story for us heading into the end of this year and into next year.
In the coming months we will see if management was right, either way the growth drivers for 2024 are there:
- $5.2 billion of loans present a variable rate that will favor the bank if the Fed keeps the "higher for longer" rate scenario as promised.
- $1.50 billion of fixed-rate loans will mature in the next 12 months, and all of them present lower rates than the bank could get today. Thus, there is a good opportunity to replace these maturing loans with new ones at significantly higher rates.
- Over the next 12 months or so the securities portfolio will generate $700 million in maturity and interest. This represents another opportunity to invest this money at higher interest rates.
These three drivers will support the recovery of the net interest margin, but it is important to make a point: they all take into account a scenario in which the Fed will not change the Fed Funds Rate. Should the decision be made to reverse monetary policy, the opportunities for refinancing at higher rates would be reduced.
Equity and shareholder remuneration
AFS and HTM securities have a large weight in total assets; in fact, they account for 27 percent. First Hawaiian is a bank that has invested heavily in its securities portfolio in recent years; however, it has done so at the wrong time. In fact, in the past, fixed-rate securities yielded very little compared to today, and this is generating unrealized losses that downsize equity.
Tangible book value per share today is $10.62, far lower than the $13.34 in 2020. In other words, although deposits and loans have increased over the past few years, AOCI is inhibiting this growth. As a result, it is not surprising that the price per share is far from historical highs.
Without the unrealized losses, the tangible book value per share would be $15.70, a completely different figure than it is today and one that would increase First Hawaiian's value. In short, AOCI is what is holding this bank back, but it will not be there forever. As the bonds expire, the unrealized losses will gradually disappear: the important thing is that the bank does not sell them to deal with a sudden liquidity crisis.
Finally, let us briefly discuss shareholder compensation.
Management believes that tangible common equity is still too low compared to their targets; therefore, it is unlikely that they will buy back shares in the short term. For the time being, it is more important to accumulate capital rather than devolve it to shareholders. After all, this bank already issues a rather large dividend.
The dividend yield is 5.80%, among the highest levels in the past 5 years. The current dividend payout ratio is 50%, so at least for the short term it seems sustainable.
Conclusion
Overall, First Hawaiian released a quarterly report in line with expectations. The market had already discounted a decline in profitability, as was the case for many other regional banks. AOCI continues to devour equity, but barring unforeseen events, the situation will be fully restored sooner or later. Finally, there is light at the end of the tunnel regarding the rising cost of deposits, in fact the migration from non-interest-bearing to interest-bearing is gradually ceasing. This will benefit the net interest margin, where we will probably see the first improvement starting in Q1 2024.
For further details see:
First Hawaiian: Downward Pressure On Net Interest Margin Is Decreasing