Hancock Whitney Feeling More Of A Macro Pinch

Summary

• Hancock Whitney was an outlier in the wrong way with fourth quarter results that included a top-line miss, though good operating leverage mitigated some of the damage.
• Management is taking a more conservative stance, including pulling back on CRE lending, but the bank continues to stand out with a low deposit beta and good profitability numbers.
• Higher provisioning will weigh on results in FY'23 and FY'24, and net interest margin is likely near a peak, but pre-provision profit growth should stand out in FY'23.
• Sentiment remains a challenge for bank stocks, but Hancock looks undervalued below $60.

Jaimie Tuchman/iStock via Getty Images

Gulfport-based Hancock Whitney (NASDAQ:HWC) has been a little frustrating here of late, as the shares have started lagging some of its regional banking peers. While I can understand some concern over peaking net interest margin and more caution from management on lending, I think it’s well worth remembering that this bank is poised for double-digit pre-provision profit growth in 2023 at a time when many banks may well struggle to get into the high single-digits.

While pre-provision profit growth should remain robust, I think the Street is concerned about the impact higher credit provisioning will have on bottom-line earnings, and indeed I do think Hancock could see a tiny year-over-year decline in 2023 and another decline in 2024. While I still expect better performance here than from many regional peers, core growth of only around 2% from FY’22 to FY’25 is admittedly not exciting. For investors willing to look past this challenging phase of the cycle, though, I think the long-term return potential remains quite positive, and I think the Street will come back to this as the Fed eases off on rates.

A Rare Top-Line Miss But Good Operating Leverage

The first thing that jumps out at me about Hancock’s fourth quarter results was that the company missed on revenue – not a common occurrence this quarter. While better operating leverage mitigated this in EPS terms, it still doesn’t help the investment case.

Revenue rose 18% year over year and about 2% quarter over quarter, missing by about 4% or around $0.02/share. Net interest income growth wasn’t bad, growing 29% yoy and more than 5% qoq, but it was still lower than I expected and stripped about $0.01/share out of earnings. Net interest income was driven by 88bp yoy and 14bp qoq improvement in net interest margin to 3.68%, weaker than I’d expected, while earning assets grew about 1.5%.

Non-interest income was weak this quarter, and weaker than I’d expected, falling about 10% yoy and qoq. Trust fees improved 3% qoq, but service charges declined 5% and card fees declined 2.5%; the biggest overall contributor to the weakness was a 39% qoq decline in the cryptic “other noninterest income” line item.

Operating costs rose 3.5% yoy and declined about 2% qoq, so even with a disappointing topline result there was good operating leverage this quarter, and this clawed back a lot of the shortfall in revenue (and a 50.7% efficiency ratio is quite good in its own right).

Pre-provision profits rose 38% yoy and 6% qoq, the latter coming in pretty “meh” relative to my expectations (a roughly 3% to $0.01/share miss).

More Conservatism On The Balance Sheet Will Slow Growth, But May Prove Wise If The Economy Really Slows

Hancock had a few surprises for me on the balance sheet, including both the growth rate and the composition of the growth, as well as with funding costs.

Loans rose almost 10% yoy (end of period) and about 2.5% qoq, and I’d expected better growth. C&I lending slowed a bit (up 2.4% qoq), but the 2% decline in CRE was a little more surprising to me. It makes sense in the context of management wanting to reduce risk – and many banks have mentioned their growing concerns with their office and retail CRE portfolios – but it was a surprise to me all the same. I was also surprised by the influx of mortgages (up almost 9% qoq); this won’t be a recurring trend, but it did have the effect of weighing a bit on loan yields relative to my expectations (limiting net interest margin).

Loan yields improved 129bp yoy and 63bp qoq to 5.12%, with new loans coming onto the balance sheet at an attractive 6.27% average yield. Commercial loan yields improved 74bp qoq to 5.25%, while mortgage yields improved just 11bp to 3.45%.

Hancock continues to impress me on the funding side. Deposits declined 4.6% yoy (end of period) but improved slightly on a sequential basis (up 0.4%), and while non-interest-bearing deposits were down (down 5% yoy and 4.5% qoq), they were down less than the roughly 7% average of most similarly-sized banks I’ve examined this quarter.

Deposit costs rose 43bp yoy and 31bp qoq to 0.50%, and Hancock still has comparatively low deposits costs with a low rate of change. With that comes a low deposit beta – I calculate a cumulative deposit beta of under 11% for Hancock, which is among the lower ones I’ve seen so far.

Credit quality remains good. Management is increasing its provisioning, but charge-offs remain steady at a very low level (0.02%) and commercial and mortgage lending are still seeing net recoveries. Non-performing loan balances shrank 2% qoq and criticized loans are less than 2% of commercial loans – a low level next to most peers.

The Outlook

Caution seems to be the word of the quarter, with management pulling back on CRE lending and expecting less C&I loan demand as the economy slows. Given that many companies are holding off on capex/expansion plans given growing uncertainty about demand in 2023, it makes sense that a lot of the demand Hancock is seeing is from line utilization (used to fund things like net working capital).

Management guided to mid-teens pre-provision profit growth (13% to 18%), and that should be well above the average for many of its peers (high single-digits to low double-digits). Working backwards from the guidance given, it would seem that management is expecting around 14% net interest income growth in FY 2023 and that roughly suggests a net interest margin of around 3.7%, or close to this quarter’s result – that’s quite consistent with broader expectations that most banks have either seen peak NIM in the fourth quarter or will see it over the next two quarters.

I have trimmed back my estimates for FY’23 and FY’24, largely on slower balance sheet growth, more limited spread leverage, and higher provisioning. These aren’t big changes, and my ’23 EPS is now about 1.1% lower than before ($6.15 versus $6.22 and just below the Street average of $6.16). I’m also a little lower than the Street for FY’24 ($6 vs. $6.03).

Long term, though, I’m still expecting core earnings growth of over 5% (over 7% if you use a pre-pandemic starting point), and I really don’t have any earnings or credit quality concerns here. Discounting those core earnings back, I think Hancock should trade at around $60. I get similar results with a ROTCE-driven P/TBV approach ($62.25) and a P/E approach using a 10x multiple on my ’24 EPS estimate (I’d normally use my ’23 EPS estimate, but since FY’24 EPS is lower, it seems more conservative to go this route).

The Bottom Line

It may seem silly to favor stocks where the companies are likely to see earnings declines in FY’24 and possibly FY’23, but it’s worth remembering that the Street looks forward. At this point I believe the issue is less about earnings growth in FY’23 and FY’24 and more about visibility at the end of the Fed’s tightening cycle. Once the Fed signals that they’re done hiking rates, I think bank stock sentiment will improve. In the meantime, I think Hancock remains a fine operator that is going overlooked, and I do still see value here for patient investors.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.