Bank of Hawaii stands out as a dominant player in its geographic market, currently presenting a rather depressed valuation. Its LTM Price/TBV per Share is only 1.80x, compared to a 10-year average of 2.55x.
Despite some challenges, including unrealized losses, the bank’s solid deposit base and attractive dividend yield make it a compelling consideration for investors.
Stability and Trust: The Main Advantage
The primary strength of Bank of Hawaii lies in the stability of its deposits, largely due to the high level of trust among its clients. Remarkably, 53% of the deposit base consists of customers with a relationship exceeding 20 years, and 21% with a relationship spanning 10 to 20 years.
This stability stems from the low competition in Hawaii, where 97% of the bank deposit market is dominated by just five banks, with Bank of Hawaii leading the pack. The bank controls one-third of the total deposits in the region.
However, this non-diversified business model also has inherent weaknesses, particularly during economic downturns in Hawaii. For instance, the recent Maui wildfires have had significant psychological and economic impacts on island residents, affecting local bank deposits.
Despite this, the bank’s cost of deposits has remained low, averaging 1.74% in Q1 2024, compared to a regional median above 2.10%.
Growth Opportunities and Loan Portfolio Quality
Bank of Hawaii’s loan portfolio has remained relatively stagnant, valued at $13.90 billion, the same as last year. The CEO, Peter Ho, has expressed a cautious outlook for growth this year, citing high interest rates that have dampened credit demand.
Despite the stagnant loan portfolio, the bank maintains a high-quality loan book, with 92% of loans to Hawaii residents, many of whom have long-standing relationships with the bank.
CRE loans account for only 27% of total loans, while residential mortgages and home equity loans comprise 33% and 16%, respectively. The weighted average FICO score for consumer loans is an impressive 791.
Although loan demand is sluggish, the bank can still generate higher yields from its existing portfolio. In the first three months of 2024, the bank earned $806 million from prepayments and maturities, which can be reinvested at far higher yields, providing a significant spread advantage. For 2024, prepayments and maturities totaling $3 billion are expected, all of which will be reinvested.
Dividend Analysis
Bank of Hawaii’s dividend has shown resilience over the decades, maintaining payouts even during periods of significant stress such as the Great Financial Crisis, the tech bubble crisis, and the pandemic.
Currently, the dividend yield is close to 5%, but future growth in the yield-on-cost is expected to be modest. The current payout ratio stands at 72.16%, which, while high, is not alarming.
The dividend’s sustainability is supported by the bank’s reliable deposit base and high-quality loan portfolio. During economic downturns, these factors provide crucial stability, potentially allowing the bank to maintain its dividend even when other banks might cut theirs.
Valuation
Bank of Hawaii is undervalued based on its Price/TBV per share ratio, which is currently 1.80x compared to a 10-year average of 2.55x. This undervaluation considers the quality of the bank’s deposits and loan portfolio.
Multiplying the current TBV per share of $30.83 by the 10-year average ratio suggests a fair value of $78.61 per share, significantly higher than the current $55 per share.
On a P/E basis, the bank’s 10-year average is 16.06x, higher than the current 14.34x, indicating that the market may be underestimating its growth potential. Reinvesting proceeds at higher yields, coupled with a relatively stable cost of deposits, could improve both NII and NIM, enhancing profitability.
Risks
Several risks must be considered:
- Unrealized Losses: The bank has $1.10 billion in unrealized losses from AFS and HTM securities, which is significant given its $1.25 billion equity. Although a total realization of these losses is unlikely, some losses could materialize, impacting the TBV.
- Geographic Concentration: The bank’s operations are heavily concentrated in Hawaii. Economic downturns in the region, such as those caused by the pandemic, can have a significant impact on the bank’s balance sheet. Hawaii’s economy, largely dependent on tourism, can be highly volatile.
- Monetary Policy: A more restrictive monetary policy than anticipated could raise the cost of deposits to around 2.50%, increasing unrealized losses and further reducing TBV per share.
Conclusion
Bank of Hawaii dominates a niche market with few competitors and a loyal customer base. While deposits and loans have stagnated, the bank’s low cost of deposits, high loan quality, and potential for improved NII and NIM present a compelling investment case.
The dividend, though slow-growing, has remained resilient through economic cycles, underscoring the bank’s stability.
Given the current undervaluation and potential for improved profitability, Bank of Hawaii is an interesting investment prospect. However, close monitoring of unrealized losses and economic conditions in Hawaii is crucial.
If the bank’s strategic initiatives succeed and economic conditions stabilize, it could offer significant upside for investors.
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Kris is a finance consultant, content marketer, and speaker specializing in helping brands and business owners navigate complex concepts and decisions. Since earning her Finance and Accounting degree, Kris has spent over half a decade writing about financial and technological concerns of brands spanning different life cycles.
