First Hawaiian’s SWOT analysis: stock outlook amid tourism recovery

First Hawaiian, Inc. (NASDAQ:FHB), a regional bank holding company headquartered in Honolulu, Hawaii, offers a range of banking services to consumer and commercial customers across Hawaii, Guam, Saipan, and California. With a market capitalization of $3.5 billion, the bank has established itself as a significant player in its markets. As the company navigates a dynamic economic landscape, analysts are closely monitoring its performance and potential for growth. According to InvestingPro data, three analysts have recently revised their earnings estimates upward for the upcoming period, suggesting growing confidence in the bank’s prospects. This comprehensive analysis examines First Hawaiian’s financial outlook, market position, and the factors influencing its stock performance.

Financial Performance and Outlook

First Hawaiian has demonstrated resilience in its financial performance, currently trading at a P/E ratio of 15.42x. Analysts project improved earnings per share (EPS) for the coming years, with fiscal year 2025 estimates at $1.92. These upward revisions reflect a stronger margin outlook, lower expenses, and smaller provisions. The bank has maintained profitability over the last twelve months, with a return on equity of 9%. However, InvestingPro’s Fair Value analysis suggests the stock is currently trading slightly above its intrinsic value. For deeper insights into FHB’s valuation metrics and growth potential, investors can access comprehensive analysis through InvestingPro’s detailed research reports.

The company’s net interest margin (NIM) is expected to expand, suggesting improved profitability in its lending operations. This positive trend is supported by anticipated balance sheet growth, which could drive increased revenue generation. However, some analysts note that loan growth has faced challenges due to elevated payoff and paydown activity, leading to a quarter-over-quarter decline in loans. Despite this, there is an expectation of a slight pickup in loan growth in the fourth quarter of 2024.

Fee income, another important revenue stream for banks, has been subject to conservative guidance from First Hawaiian. While this may indicate limited near-term growth from fees, it could also suggest potential upside if the company outperforms its cautious projections.

Market Position and Competitive Landscape

First Hawaiian holds a significant position in its core markets, particularly in Hawaii, generating annual revenue of $793.79 million. The company’s strong deposit franchise is frequently highlighted as a key competitive advantage. Analysts consider this franchise to be of high quality, which contributes to the bank’s perceived stability and justifies a premium valuation relative to its peers. The bank has demonstrated its commitment to shareholder returns, maintaining dividend payments for 10 consecutive years, with a current dividend yield of 3.77%. InvestingPro subscribers can access additional insights about FHB’s competitive positioning and financial health metrics through our comprehensive Pro Research Reports, available for over 1,400 US stocks.

In terms of credit quality, First Hawaiian is regarded as one of the best performers among its peers. This strong credit standing enhances the bank’s risk profile and could provide a buffer against potential economic headwinds. However, a recent increase in criticized loans from one quarter to the next has been noted, which warrants monitoring for any developing trends in asset quality.

Capital Management and Shareholder Value

First Hawaiian has taken steps to enhance shareholder value through its capital management strategies. A significant development is the announcement of a $100 million share repurchase authorization. This program is expected to become a more prominent part of the company’s narrative in the current year and could support earnings per share growth while providing potential upside for stock valuation.

The company’s dividend policy also contributes to its appeal for income-focused investors. With a dividend yield of approximately 3.7% based on previous reports, First Hawaiian offers a competitive return in the current interest rate environment.

Credit Quality and Risk Management

The bank’s conservative approach to risk management is reflected in its strong credit quality metrics. This conservative stance has contributed to First Hawaiian’s reputation for credit safety, which analysts cite as a justification for its premium valuation. In a risk-off scenario within the banking sector, First Hawaiian could potentially benefit from its perceived stability.

However, the increase in criticized loans observed in recent quarters introduces an element of caution. While not necessarily indicative of immediate credit issues, this trend will likely be closely monitored by investors and analysts for any signs of deterioration in the loan portfolio.

Economic Factors and Industry Trends

The economic recovery, particularly in the tourism sector, plays a crucial role in First Hawaiian’s outlook. The pace of recovery in tourism could significantly impact the bank’s earnings trajectory. A faster-than-expected recovery could lead to better EPS growth and potentially drive stock performance.

The banking industry as a whole is facing challenges, including compressed margins due to low interest rates and increased competition. However, some analysts maintain a positive industry view for U.S. Mid-Cap Banks, suggesting potential tailwinds for companies like First Hawaiian.

Bear Case

How might slower tourism recovery impact FHB’s earnings?

A slower recovery in the tourism sector could significantly impact First Hawaiian’s earnings potential. The bank’s core markets, particularly Hawaii, are heavily dependent on tourism. If visitor numbers and spending remain depressed for an extended period, it could lead to reduced loan demand, increased credit risks, and lower transaction volumes. This scenario might result in slower balance sheet growth, pressure on net interest margins, and potentially higher loan loss provisions. Additionally, businesses reliant on tourism may struggle to meet their financial obligations, potentially leading to an increase in non-performing loans and credit losses. The ripple effects could extend to reduced fee income from areas such as wealth management and treasury services, as local businesses and individuals face financial constraints.

What risks does the premium valuation pose for FHB’s stock?

First Hawaiian’s premium valuation, while reflective of its strong deposit franchise and perceived credit safety, also presents risks to its stock performance. Trading at a higher multiple compared to peers means that the stock may have less room for upside potential and could be more vulnerable to downside risks. If the bank fails to meet the high expectations built into its valuation, investors may reassess their positions, potentially leading to stock price declines. Moreover, in a scenario where the broader banking sector faces challenges or investor sentiment turns negative, stocks with premium valuations may experience more significant corrections as investors seek value elsewhere. The premium valuation also implies that any missteps in execution or unexpected negative developments could have an outsized impact on the stock price, as the market may be less forgiving of companies priced for near-perfection.

Bull Case

How could FHB benefit from a faster economic recovery?

A faster economic recovery, particularly in the tourism sector, could significantly boost First Hawaiian’s financial performance. An accelerated return of visitors to Hawaii and other key markets would likely stimulate loan demand, especially from businesses in the hospitality and related industries. This could drive balance sheet growth and improve net interest income. Increased economic activity would also likely lead to higher transaction volumes, benefiting the bank’s fee income streams from areas such as credit card usage, foreign exchange, and wealth management services. A robust recovery could also improve the credit quality of the loan portfolio, potentially leading to lower loan loss provisions and improved profitability. Furthermore, a stronger economy might create opportunities for the bank to expand its market share and introduce new products or services to meet growing customer needs.

What impact could the share repurchase program have on shareholder value?

The $100 million share repurchase program announced by First Hawaiian has the potential to significantly enhance shareholder value. By reducing the number of outstanding shares, the program could lead to an increase in earnings per share, even if total net income remains constant. This could make the stock more attractive to investors and potentially drive up the share price. Share repurchases also signal management’s confidence in the company’s financial health and future prospects, which can positively influence investor sentiment. Additionally, the program provides flexibility in capital allocation, allowing the bank to return value to shareholders in a tax-efficient manner compared to dividends. If executed at favorable price points, the repurchases could represent an efficient use of capital, especially if management believes the stock is undervalued. Over time, this could lead to improved return on equity metrics and potentially support a higher valuation multiple for the stock.

SWOT Analysis

Strengths:

• Strong deposit franchise with high-quality customer base
• Superior credit quality compared to peers
• Conservative reputation enhancing perceived stability
• Solid market position in core Hawaiian market

Weaknesses:

• Limited near-term earnings catalysts identified by analysts
• Premium valuation potentially limiting upside potential
• Recent increase in criticized loans

Opportunities:

• Potential for faster economic recovery, particularly in tourism sector
• Balance sheet expansion and loan growth prospects
• Share repurchase program enhancing shareholder value
• Possible outperformance of conservative fee income guidance

Threats:

• Slower tourism recovery impacting loan demand and credit quality
• Competitive banking landscape pressuring margins
• Potential for economic downturn affecting credit performance
• Regulatory changes impacting banking operations or capital requirements

Analysts Targets

• Piper Sandler: $30.00 (February 3rd, 2025)
• Barclays (LON:BARC): $30.00 (February 3rd, 2025)
• Stephens Inc.: $30.00 (November 27th, 2024)
• Barclays: $25.00 (October 28th, 2024)
• Wells Fargo (NYSE:WFC) Securities: $22.00 (July 29th, 2024)

This analysis is based on information available up to February 3, 2025.

InvestingPro: Smarter Decisions, Better Returns

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