First Hawaiian Stock: Favorable Economic Factors To Limit Earnings Decline (NASDAQ:FHB)

Earnings of First Hawaiian, Inc. (NASDAQ: FHB) will likely decline this year due to the rise in the provision and operating expenses. On the other hand, decent loan growth on the back of economic strength will likely support the bottom line. Moreover, First Hawaiian is well-positioned to benefit from an interest rate hike due to its loan mix. Overall, I am expecting the company to report earnings of $1.73 per share in 2022, down 15.5% year-over-year. The year-end target price is quite close to the current market price. As a result, I’m adopting a Hold rating on First Hawaiian, Inc.

Loan Growth to Trend Towards a Normal Level This Year

After declining by 6.6% by the end of September 2021 from the end of June 2020, the loan growth trend turned positive in the last quarter of 2021. Excluding Paycheck Protection Program (“PPP”) loans, the loan portfolio grew by an impressive 3.4% in the fourth quarter, as mentioned in the investor presentation. The management is optimistic that the loan growth momentum will continue this year. As mentioned in the conference call, the management expects loan growth to be in the mid-to-high single-digit range in 2022.

Mid-single-digit loan growth is easily achievable given that First Hawaiian has recorded similar growth before the pandemic. Further, Hawaii’s economy is recovering well from the pandemic. The Economic Research Organization at the University of Hawaii (“UHERO”) expects decent GDP growth of 2.7% in 2022, as mentioned in its latest forecast report. Additionally, UHERO expects the unemployment rate to dip to 5.4% in 2022 from 7.7% in 2021 and 11.8% in 2020. However, the anticipated unemployment rate is still higher than the pre-pandemic (2019) unemployment rate of 2.5%.

On the other hand, the upcoming forgiveness of the remaining PPP loans will somewhat restrict loan growth this year. PPP loans outstanding totaled $216.4 million at the end of December 2021, representing 1.7% of total loans, as mentioned in the earnings release. I’m expecting most of these loans to get forgiven during the early part of 2022.

Overall, I’m expecting the loan portfolio to grow by 5.1% this year. Meanwhile, the deposit growth will likely match loan growth. The following table shows my balance sheet estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Financial Position
Net Loans	12,140	12,934	13,081	13,071	12,805	13,457
Growth of Net Loans	6.6%	6.5%	1.1%	(0.1)%	(2.0)%	5.1%
Other Earning Assets	5,903	5,106	4,410	6,821	9,440	9,921
Total assets	20,549	20,696	20,167	22,663	24,992	26,194
Deposits	17,612	17,150	16,445	19,228	21,816	22,928
Borrowings and Sub-Debt	0	600	600	200	–	–
Common equity	2,533	2,525	2,640	2,744	2,657	2,747
Book Value Per Share ($)	18.1	18.4	19.8	21.1	20.7	21.2
Tangible BVPS ($)	11.0	11.2	12.3	13.4	12.9	13.5
Source: SEC Filings, Author’s Estimates
(In USD million unless otherwise specified)

Fluid Loan Yields to Boost Earnings Amid a Rising Interest-Rate Environment

The tapering off of PPP fees will drag the net interest margin following the forgiveness. The management mentioned in the conference call that it expects the margin to decline by 6 to 8 basis points because of the PPP forgiveness.

On the other hand, the pre-payment of costly FHLB (Federal Home Loan Bank System) advances totaling $200 million in the last quarter will reduce the interest expense and support the margin. As mentioned in the presentation, the management expects to save $5.5 million worth of interest expenses in 2022 due to the pre-payment.

Further, the margin will benefit from the rising interest-rate environment. As mentioned in the conference call, floating-rate loans totaled $4.8 billion at the end of the last quarter. Further, around $3.3 billion worth of loans will run off this year. This means that around 62% of the loan portfolio will re-price soon after a rate hike this year.

The management’s interest-rate sensitivity analysis given in the third quarter’s 10-Q filing shows that a 100-basis points increase in the interest rate can boost the net interest income by 7.2% over twelve months. Considering the factors mentioned above and management’s guidance, I’m expecting the net interest margin to decline by 6 basis points in the first quarter of 2022 from 2.38% in the last quarter of 2021. Beyond the first quarter, I’m expecting the margin to rise by 6 basis points each in the second and third quarters of the year.

Provisioning for Loan Losses to Trend Higher

First Hawaiian reversed a significant part of its previous provisioning during 2021. As a result, its allowances declined from 1.6% of total loans at the end of December 2020 to 1.2% of total loans at the end of December 2021. The current allowance level is around 22 times the non-accrual loans, as mentioned in the earnings release. As the allowances are still relatively excessive, there is a possibility of further reserve releases. Nevertheless, the provision expense, net of reversals, will most probably grow this year due to significant loan additions. Overall, I’m expecting the net provision expense for 2022 to be higher than 2021 but below the pre-pandemic average. I’m expecting the net provision expense to make up around 0.12% of total loans in 2022, as opposed to 0.14% of total loans from 2017 to 2019.

Expecting 2022 Earnings of $1.73 per Share

The higher net provision expense will likely drag earnings this year relative to last year. Moreover, the management expects non-interest expenses to surge this year on the back of wage inflation, increasing level of business activity, and additional technological investments, as mentioned in the conference call. However, the non-recurrence of the $9 million FHLB advance termination fee will ease the pressure on non-interest expenses.

Mid-single digit loan growth and margin expansion will likely support the bottom line this year. Overall, I’m expecting First Hawaiian to report earnings of $1.73 per share in 2022, down 15.5% year-over-year. The following table shows my income statement estimates.

	FY17	FY18	FY19	FY20	FY21	FY22E
Income Statement
Net interest income	529	566	573	536	531	560
Provision for loan losses	19	22	14	122	(39)	16
Non-interest income	206	179	193	197	185	188
Non-interest expense	348	365	370	368	405	433
Net income – Common Sh.	184	264	284	186	266	224
EPS – Diluted ($)	1.32	1.93	2.13	1.43	2.05	1.73
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 the COVID-19 pandemic.

Current Market Price is Quite Close to the Year-Ahead Target Price

First Hawaiian is offering a dividend yield of 3.6% at the current quarterly dividend rate of $0.26 per share. The earnings and dividend estimates suggest a payout ratio of 60% for 2022, which is high but easily affordable. Further, it is quite close to the five-year average of 58%. Therefore, I don’t think there is any threat of a dividend cut.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First Hawaiian. The stock has traded at an average P/TB ratio of 2.19 in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	Average
T. Book Value per Share ($)	11.0	11.2	12.3	13.4	12.9
Average Market Price ($)	29.8	27.8	26.6	19.6	27.7
Historical P/TB	2.71x	2.50x	2.16x	1.46x	2.14x	2.19x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple with the forecast tangible book value per share of $13.5 gives a target price of $29.6 for the end of 2022. This price target implies a 1.3% upside from the February 9 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	1.99x	2.09x	2.19x	2.29x	2.39x
TBVPS – Dec 2022 ($)	13.5	13.5	13.5	13.5	13.5
Target Price ($)	26.9	28.3	29.6	31.0	32.3
Market Price ($)	29.3	29.3	29.3	29.3	29.3
Upside/(Downside)	(7.9)%	(3.3)%	1.3%	5.9%	10.6%
Source: Author’s Estimates

The stock has traded at an average P/E ratio of around 15.4x in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	Average
Earnings per Share ($)	1.32	1.93	2.13	1.43	2.05
Average Market Price ($)	29.8	27.8	26.6	19.6	27.7
Historical P/E	22.7x	14.4x	12.5x	13.7x	13.5x	15.4x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the forecast earnings per share of $1.73 gives a target price of $26.6 for the end of 2022. This price target implies a 9.1% downside from the February 9 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	13.4x	14.4x	15.4x	16.4x	17.4x
EPS 2022 ($)	1.73	1.73	1.73	1.73	1.73
Target Price ($)	23.1	24.9	26.6	28.3	30.1
Market Price ($)	29.3	29.3	29.3	29.3	29.3
Upside/(Downside)	(20.9)%	(15.0)%	(9.1)%	(3.2)%	2.8%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $28.1, which implies a 3.9% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 0.3%. Hence, I’m adopting a Hold rating on First Hawaiian, Inc. I would consider investing in the stock only if its market price dips by more than 15% from the current level.