MichaelSchmichael

When Bank of Hawaii Falls Below 52-Week Low, It's Time to Buy

The fundamentals on this stock don't justify its high valuation (it is trading at 2.5X reported book value, which is about twice where most banks are trading). This implies a credit quality I think undeserving in this environment. BOH has about $10B in total assets. $2.6B of that are in investment securities, of which ~$300 million are in non-agency MBS. The non-agency MBS have been written down by less than 10% from cost, so I expect further writedowns here. BOH has about $4B in consumer loans, the majority of such ($2.6B) is in residential mortgages secured by property in Hawaii. A significant portion of Hawaiian homes and condos are second-homes owned by non-residents from the US and Asia. These loans default at a higher rate than those secured by owner-occupied homes. C&I, commercial mortgage and construction make up an additional $2B, and we are just seeing the tip of the iceberg in defaults in those books.

In the end, Hawaii's economy reflects what is happening in the US and Asia, and the signals from both of those markets point strongly down. Those counting on Hawaii's economy being immune from this are akin to those who believed ______________ (fill in market where people in the past have claimed immunity, e.g., Manhattan's real estate market) was immune. It is coming to Hawaii, too, and when it does this stock will be flirting with the lowest of the three Dow downside targets cited by the author.

Long puts.