Improving the local economy and strong deposit balances will help Bank of Hawaii Corporation (BOH – Free Report) generate higher loans and pursue other general business goals. However, investments in technology, innovation and other variable expenses keep the cost base high.
The strength of Bank of Hawaii’s balance sheet is reflected in the growth of its deposits and loans. The company’s deposit base registered a five-year compound annual growth rate (CAGR) of 8.1% (2017-2021), while loans registered a CAGR of 5.8% over the same period. period. A low-cost, long-term core deposit base and a healthy mix of variable loans position the BOH well in the expected higher rate environment.
Supported by loan growth and interest rate hikes, BOH should see an increase in net interest income (NII) and margin in the period ahead. Therefore, we believe the company is well positioned to maintain its upward revenue trend in the days ahead. In fact, revenue has registered a CAGR of 1% over the last five years (2017-2021) due to the increase in the NII.
We remain encouraged by Bank of Hawaii’s efforts to increase shareholder value through its capital deployment activities. In July 2021, the company sequentially increased its quarterly dividend by 4.5% to 70 cents per share. It has a stock buyback program in place with $75.8 million of authorization remaining at the end of the first quarter. Its strong capital levels and ability to generate income will allow it to continue its buyout activity.
Additionally, the company’s debt-to-equity ratio compares favorably to the industry as a whole, showing that these businesses are sustainable in the future.
Bank of Hawaii’s rising cost base exposes the company to operational risk and remains a near-term headwind to earnings growth. As the company continues to invest more in technology, innovation and other variable expenses, its cost base is expected to remain high in the period ahead. Management expects 2022 spending to increase 6-7% year-over-year to $414-415 million due to inflationary pressures. As a result, increased spending is likely to remain a near-term headwind to earnings growth.
Revenue from BOH fees has been declining in recent years. Going forward, the lack of diversification efforts to expand revenue streams may continue to limit top line growth. Additionally, management expects mortgage bank revenue and asset management fees to be lower in 2022 due to higher interest rates and weaker markets.
Additionally, given the high debt levels and low cash balance, we believe that the Bank of Hawaii could face problems repaying its borrowings if the economic situation deteriorates.
So far this year, shares of BOH have lost 7.3%, against a 24% drop in the industry to which it belongs.
Image source: Zacks Investment Research
Currently, BOH carries a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Actions worth a look
A few higher ranked stocks in the banking sector are Independent banking company (IBCP – free report) and Civista Bancshares, Inc. (CIVB – free report). IBCP sports a Zacks rank of 1 while CIVB currently sports a Zacks rank of 2 (buy).
Independent Bank’s Zacks consensus estimate for current-year earnings has been revised up 6.5% in the past 30 days. Over the past six months, IBCP shares are down 14.9%.
Civista Bancshares also saw a 3% upward revision to its 2022 earnings estimates in the past 30 days. Over the past six months, CIVB shares are down 11.3%.