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Bank Of Hawaii: Interest Rates, Expenses To Pressurize Earnings

Mar. 09, 2020 12:06 PM ETBank of Hawaii Corporation (BOH)
Sheen Bay Research profile picture
Sheen Bay Research


  • Earnings are expected to decline partly because of the Fed rate cut in March that will squeeze margin.
  • Branch network expansion is expected to add to expenses, thereby dragging earnings this year.
  • Quarterly dividend is expected to be maintained at $0.67 per share, implying a dividend yield of 3.8%.

Bank of Hawaii’s (NYSE:BOH) earnings are expected to dip in 2020 partly because of the Fed rate cut in March that will compress margin. Further pressure is expected to come from the normalization of non-interest income. In addition, BOH plans on expanding its network which will increase operating expenses and hence drag earnings. The December 2020 target price implies a significant potential for capital appreciation, thereby, making BOH a good investment for a year’s time frame. Outlook for the near term is, however, not bright due to COVID-19 and the resultant deterioration of market sentiment. As the outbreak could take up to three months to settle down, I’m expecting jitters to remain in equities for the next quarter. Therefore, for the short term, I’m adopting a neutral rating.

Margin Compression To Undermine Loan Growth

BOH’s net interest margin, NIM, is expected to be one of the chief contributors to a decline in earnings this year. The 50bps Fed funds rate cut in March is expected to pressurize NIM as the effect of lower interest rates on yields will overcome the impact on deposit cost. However, as mentioned in the fourth quarter conference call, there was some lagged positive impact remaining to be taken from last year’s rate cuts, which will be realized this year. This positive impact is to come through a reduction in deposit costs. Consequently, I’m expecting the compression in NIM to be limited. As shown in the table below, I’m expecting BOH’s NIM to decline by 4bps in the first quarter and then by 2bps in the second quarter before stabilizing, on a linked-quarter basis.

Bank of Hawaii Net Interest Margin

The impact of lower NIM on net interest income is expected to be mostly offset by an expansion in the loan portfolio. BOH is planning to expand its branch network by four more

This article was written by

Sheen Bay Research profile picture
Around 10 years of experience covering Banks and Macroeconomics. Passionate about discovering lucrative investments and generating alpha.

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