Summary
- Loan growth will decline from the unsustainable level observed during the first nine months of 2022. However, hot labor markets will sustain loan growth.
- The margin will not expand as much as before because the deposit mix has recently worsened.
- The December 2023 target price suggests a high upside from the current market price. Further, HAFC is offering a good dividend yield.
Earnings of Hanmi Financial Corporation ( HAFC ) will most probably be flattish in both 2022 and 2023. Decent loan growth and slight margin expansion will likely boost earnings. On the other hand, a commensurate increase in operating expenses and normalization of provision expenses will almost cancel out the effect of the topline growth. Overall, I'm expecting Hanmi Financial to report earnings of $3.26 per share for 2022 and $3.28 per share for 2023. Next year's target price suggests a high upside from the current market price. Therefore, I'm adopting a buy rating on Hanmi Financial Corporation.
Loan Growth Likely to Remain Near the Historical Average
Hanmi Financial Corporation's loan growth has been quite impressive so far this year. The portfolio has grown by 12.8% in nine months, or 17% annualized, which is extraordinary considering the company's history. The growth was broad-based with material contribution from the Corporate Korea initiative, as mentioned in the third quarter's conference call . The management expects loan growth to return to historic levels in the second half of the year (mentioned in the second quarter's conference call and reiterated in the third quarter's conference call). The management also expects mortgage origination to moderate in the fourth quarter as higher interest rates are "now having an impact on both the purchase and refinance markets", as mentioned in the conference call.
On the other hand, hot labor markets will likely drive economic activity and sustain credit demand. Hanmi Financial caters to multiethnic communities in California, Texas, Illinois Virginia, New Jersey, New York, Colorado, Washington, and Georgia. As these markets are quite diverse, it's best to consider the national average when attempting to gauge credit demand. As shown below, the unemployment rate is near multi-decade lows.
Considering these factors, I'm expecting the loan portfolio to grow by 1.5% every quarter till the end of 2023. This will lead to full-year loan growth of 14.5% for 2022 and 6.1% for 2023. I'm expecting deposits and some other balance sheet items to grow in line with loans. However, the growth of equity book value will face pressure from unrealized mark-to-market losses on the available-for-sale securities portfolio. The portfolio has already accumulated large losses because its market value has declined as interest rates have risen. The following table shows my balance sheet estimates.
FY18 | FY19 | FY20 | FY21 | FY22E | FY23E | |
Financial Position | ||||||
Net Loans | 4,569 | 4,549 | 4,790 | 5,079 | 5,815 | 6,172 |
Growth of Net Loans | 6.9% | (0.4)% | 5.3% | 6.0% | 14.5% | 6.1% |
Other Earning Assets | 601 | 657 | 762 | 924 | 846 | 872 |
Deposits | 4,747 | 4,699 | 5,275 | 5,786 | 6,294 | 6,681 |
Borrowings and Sub-Debt | 173 | 208 | 269 | 353 | 231 | 238 |
Common Equity | 553 | 563 | 577 | 643 | 597 | 637 |
Book Value Per Share ($) | 17.2 | 18.3 | 19.1 | 21.1 | 19.7 | 20.9 |
Tangible BVPS ($) | 16.9 | 17.9 | 18.7 | 20.7 | 19.3 | 20.6 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Margin Expansion to Slow Down
Hanmi Financial Corporation's net interest margin expanded by 70 basis points while the fed funds rate increased by 300 basis points in the first nine months of 2022. Following the 75 basis points hike in November, I'm expecting a further 75 basis points hike till the mid of 2023, which will drive the margin up even further in the coming months. The results of the management's interest-rate sensitivity analysis given in the second quarter's 10-Q filing showed that a 200-basis point hike in interest rates could boost the net interest income by 6.15% in the first year and 10.9% in the second year of the rate hike.
2Q 2022 10-Q Filing
Part of the moderate rate sensitivity is attributable to the loan mix. Around 54% of the loan portfolio (including fixed-rate loans) will reprice within a year, according to details given in the third quarter's earnings presentation . Further, a large balance of non-interest-bearing deposits will hold back the deposit cost in the ongoing up-rate cycle. Non-interest-bearing deposits made up 44.7% of total deposits at the end of September 2022.
New loan additions will also lift the average earning-asset yield going forward. This is because the average interest rate on new loans produced was 5.55% during the third quarter of 2022, as mentioned in the presentation. This rate on new loans is much higher than the portfolio's average yield of 4.39%, as mentioned in the earnings release .
However, Hanmi's deposit mix has worsened over the last few quarters as the high loan growth led to a funding gap that the management had to bridge through the promotion of costly deposits. As a result, time deposits increased to 18.5% of total deposits by the end of September 2022 from 15.2% of total deposits at the end of June 2022. Due to this recent deposit mix shift, the deposit beta, or rate sensitivity, will increase going forward
Considering these factors, I'm expecting the margin to increase by only five basis points in the last quarter of 2022 and eight basis points in 2023.
Earnings Likely to be Flattish
The anticipated loan growth and slight margin expansion discussed above will likely support earnings through the end of 2023. On the other hand, an inflation-driven rise in operating expenses will drag earnings. Further, I'm expecting the provisioning expense to rise to the historical average in the coming months, which will further pressurize earnings. Overall, I'm expecting Hanmi Financial to report earnings of $3.26 per share for 2022, up by just 1.3% year-over-year. For 2023, I'm expecting earnings to increase by just 0.6% to $3.28 per share. The following table shows my income statement estimates.
FY18 | FY19 | FY20 | FY21 | FY22E | FY23E | |
Income Statement | ||||||
Net interest income | 181 | 176 | 181 | 195 | 238 | 272 |
Provision for loan losses | 4 | 30 | 45 | (24) | 5 | 15 |
Non-interest income | 25 | 28 | 43 | 40 | 35 | 33 |
Non-interest expense | 118 | 126 | 119 | 124 | 130 | 154 |
Net income - Common Sh. | 58 | 33 | 42 | 98 | 99 | 100 |
EPS - Diluted ($) | 1.81 | 1.06 | 1.39 | 3.22 | 3.26 | 3.28 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.
HAFC Currently Trading at a Significant Discount to the Target Price
Hanmi Financial is offering a dividend yield of 3.9% at the current quarterly dividend rate of $0.25 per share. The earnings and dividend estimates suggest a payout ratio of 30% for 2023, which is below the five-year average of 49%. Nevertheless, I'm not expecting an increase in the dividend level as I'm expecting earnings to be flattish.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Hanmi Financial. The stock has traded at an average P/TB ratio of 1.08 in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | |
T. Book Value per Share ($) | 16.9 | 17.9 | 18.7 | 20.7 | |
Average Market Price ($) | 27.1 | 20.7 | 11.2 | 19.4 | |
Historical P/TB | 1.61x | 1.16x | 0.60x | 0.94x | 1.08x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $20.6 gives a target price of $22.1 for the end of 2023. This price target implies a 13.7% downside from the November 3 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 0.88x | 0.98x | 1.08x | 1.18x | 1.28x |
TBVPS - Dec 2023 ($) | 20.6 | 20.6 | 20.6 | 20.6 | 20.6 |
Target Price | 18.0 | 20.1 | 22.1 | 24.2 | 26.3 |
Market Price | 25.7 | 25.7 | 25.7 | 25.7 | 25.7 |
Upside/(Downside) | (29.8)% | (21.7)% | (13.7)% | (5.7)% | 2.3% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 12.2x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | |
Earnings per Share ($) | 1.81 | 1.06 | 1.39 | 3.22 | |
Average Market Price ($) | 27.1 | 20.7 | 11.2 | 19.4 | |
Historical P/E | 15.0x | 19.5x | 8.1x | 6.0x | 12.2x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $3.28 gives a target price of $39.9 for the end of 2023. This price target implies a 55.5% upside from the November 3 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 10.2x | 11.2x | 12.2x | 13.2x | 14.2x |
EPS 2023 ($) | 3.28 | 3.28 | 3.28 | 3.28 | 3.28 |
Target Price ($) | 33.3 | 36.6 | 39.9 | 43.2 | 46.5 |
Market Price ($) | 25.7 | 25.7 | 25.7 | 25.7 | 25.7 |
Upside/(Downside) | 29.9% | 42.7% | 55.5% | 68.3% | 81.1% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $31.0 , which implies a 20.9% upside from the current market price. Adding the forward dividend yield gives a total expected return of 24.6%. Hence, I'm adopting a buy rating on Hanmi Financial Corporation.
For further details see:
Hanmi Financial: Attractively Valued However Earnings Likely To Be Flattish