Matteo ColomboEvery investor has certain strengths and certain weaknesses. One of my weaknesses is that sometimes I can give a company a little more credit than it probably deserves. A good example of this can be seen by looking at Bank of Hawaii (NYSE:BOH), a bank that, obviously, gets much of its business from Hawaii. Back in January of this year, I downgraded the stock to a ‘hold’ rating from the ‘buy’ rating that I had on the stock leading up to that point. This was after seeing shares spike 38.5% compared to the 19.5% rise seen by the S&P 500 since I had written about the company previously in March of 2023. Since then, things have not gone particularly well. Shares are down 13.7% at a time when the S&P 500 is up 9%. Looking at the picture now, and seeing not only a decline in deposits recently, combined with weakness on the income statement, a downgrade to something more pessimistic like a ‘sell’ rating was probably appropriate. Even though the stock has dropped as of late, I don’t think shares are cheap enough to warrant any real degree of optimism. Given this, I am now rectifying my previous mistake by downgrading the firm. Time to turn bearish Fundamentally speaking, things have not been exactly great for Bank of Hawaii as of late. To start with, we can touch on the balance sheet side of the equation. As of the end of the first quarter of the 2024 fiscal year, the company had deposits of $20.68 billion. This represents a decline from the nearly $21.06 billion that the institution had at the end of 2023. And it puts the company nearly back to the $20.62 billion in deposits that it had at the end of the prior year. In addition to this, uninsured deposit exposure remains high. In fact, it has risen from 52% to the end of 2022 to 58% today. Generally speaking, I prefer this to be 30% or lower. But as I detailed in my prior work on the company, some wiggle room would be appropriate based on how entrenched the company is in the Hawaiian economy and the fact that a large portion of its deposit base is comprised of very long-term customers. Author – SEC EDGAR Data Deposits have not been the only weak spot for the institution. The value of loans came in at $13.71 billion as of the end of the most recent quarter. That’s down from $13.82 billion at the end of 2023. And it is only marginally higher than the $13.65 billion that the institution had at the end of the 2022 fiscal year. Over the same window of time, we have also seen a decline in the value of securities. They totaled $8.16 billion in 2022. By the end of last year, they had fallen to $7.41 billion, before dropping further to $7.27 billion today. The same can also be said of cash. Although cash was only $320.4 million in 2022, it rose to $692.9 million at the end of last year. But today, it is slightly lower at $676.2 million. It would be one thing if these declines were accompanied by a drop in the value of debt. We have seen a drop from the end of 2022. But debt has remained flat since the third quarter of the 2023 fiscal year. Author – SEC EDGAR Data The overall decline in deposits, loans, securities, and cash, have been instrumental in pushing income statement items for the institution down. As an example, we need only look at financial performance covering the first quarter of 2024. During that quarter, net interest income came in at $111.9 million. This is down from the $134 million reported one year earlier. It is important to note that while interest earning assets fell from $22.29 billion to $21.74 billion during this window of time, the firm’s net interest margin also contracted, dropping from 2.47% to 2.11%. This might not seem like a large disparity, but when applied to the average balance of interest earning assets as of the end of the most recent quarter, it translates to a reduction in net interest income of $78.3 million. Author – SEC EDGAR Data This is not to say that everything has been bad. In the first quarter of 2024, non-interest income for the bank came in at $42.3 million. That is a marginal improvement over the $40.7 million reported for the first quarter of 2023. There are several factors that influenced this change. But it appears as though the most significant would have been a rise in trust and asset management revenue from $10.7 million to $11.2 million, and an increase in bank owned life insurance income from $2.8 million to just under $3.4 million. Sadly, this improvement did not stop net profits from falling from $44.9 million to $34.4 million. And as the chart above illustrates, this follows a rather weak 2023 fiscal year relative to what the company achieved in 2022. Author – SEC EDGAR Data These weak spots are not the only reason why I’m downgrading the stock. There are a couple of other factors as well. For instance, I have become more selective of valuation in this space over the past several months. And using data from 2023, Bank of Hawaii is trading at a price to earnings multiple of 13.8. As the chart above illustrates, this means that four of the five banks that I decided to compare the business to are trading at multiples lower than what Bank of Hawaii can be picked up for. But this isn’t the only way to value a firm like this. In the chart below, you can also see how shares are priced relative to both book value and tangible book value. In both cases, four of the five comparable firms are trading for less than what our candidate is going for. Author – SEC EDGAR Data I will say that, from my experience, banks with large amounts of non-interest income often warrant trading multiples higher than what banks with low non-interest income do. And if we use data from the most recent quarter, non-interest income generated by Bank of Hawaii accounts for 27.4% of total net revenue for the bank. But this kind of premium only makes sense when the assets in question are of a high quality. In the first chart below, you can see the return on assets, not only for our candidate, but also for the same five banks that I’m comparing it to. Only one of the five institutions have a return on assets lower than what Bank of Hawaii currently has. In the subsequent chart, I did the same thing, looking at the return on equity. In this case, Bank of Hawaii fares better. But even here, three of the five are lower than it. So that means that two have higher return on equity ratings than it does. This isn’t bad, but it’s not great. Author – SEC EDGAR DataAuthor – SEC EDGAR Data Takeaway At this point in time, I must say that I am not terribly impressed with Bank of Hawaii these days. Given recent weaknesses, such as declining deposits, falling loan values, a drop in securities, and a decline in cash, not to mention how shares are priced and the quality of the institution’s assets, I would argue that a downgrade to a soft ‘sell’ rating is logical at this point in time.
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