First Hawaiian, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

First Hawaiian, Inc. is a bank holding company, operating primarily in Hawaii, Guam, and Saipan. It provides a range of financial services, including commercial banking, retail banking, and wealth management services, to individuals, businesses, and government entities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

First Hawaiian, Inc. (FHB), through its subsidiary First Hawaiian Bank, is the oldest and largest bank in Hawaii.

Business Overview

First Hawaiian, Inc. (FHB) operates primarily as a traditional, relationship-focused bank in Hawaii, Guam, and Saipan. The bank provides financial services to individuals, businesses, and government entities through a network of branches, online platforms, and ATMs.

  • Retail Banking: FHB provides personal banking services, including checking and savings accounts, mortgages, credit cards, and personal loans, primarily to consumers.

  • Commercial Banking: FHB offers products and services including real estate, commercial and industrial loans, term loans, working capital facilities, and other financial solutions to both small and large businesses.

  • Treasury and Other: FHB’s treasury business involves the management of the company’s investment securities portfolio, funding and hedging activities, interest rate risk management, and other non core-business activities.

Competitive Landscape

The banking industry in Hawaii, where FHB operates primarily, is characterized by the following elements:

  • Established Competitors: FHB competes with a mix of national and local banks, credit unions, and nonbank financial companies.
  • Customer Relationships: Localized relationships, word-of-mouth referrals, and branches are essential, especially within Hawaii.
  • Regulatory Environment: Heavy regulatory oversight is a part of the industry that can limit operations and introduce compliance costs.

What Makes FHB Different?

FHB distinguishes itself through several factors:

  • Long-standing Presence: The oldest and largest bank in Hawaii, FHB has strong brand recognition and a loyal customer base built over decades.
  • Deep Local Ties: FHB’s strong relationships with the local communities, businesses, and governments give it a competitive edge.
  • Extensive Branch Network: FHB’s extensive branch and ATM network provides easy access for customers.
  • Solid Performance: The bank generates a consistent positive spread in their net interest income and has managed to keep loan losses to a minimum, resulting in strong ROIC figures.

Moat Analysis: 3/5

FHB possesses a moderate economic moat. While it may be hard for direct competitors to catch up in market share for the foreseeable future (due to brand, size, distribution, scale, and regulations), new age financial companies and fintech are offering some new types of services that threaten traditional banking methods, such as BNPL, or even the way people hold their capital. The bank’s moat is primarily derived from:

  • Brand Reputation: Its long history and community presence is a form of intangible advantage. However, it may not be enough in the face of other large players (as seen with their limited reach outside Hawaii).
  • Customer Switching Costs: While not high, they are relevant because switching financial institutions is often cumbersome, with auto-pay, direct-deposit, and other integration tasks involved. The switching costs for the individual is low, but for large commercial customers, the integration involved is higher.
  • Regulatory Barriers: Stringent regulatory approval, especially in a regulated market like finance, makes new competition harder.
  • Economies of Scale: Due to operating on island (or regions with limited land size), there are only a finite number of areas for new entrants to place branches. It is unlikely competitors can build a branch for every location in Hawaii. Therefore, the main way that most firms will compete is through mobile banking and other internet/financial services (which are more vulnerable to competition).

Risks to the Moat and Business Resilience

Despite its strengths, FHB faces several risks that could erode its moat and resilience:

  • Disruptive Technologies: The financial technology (fintech) sector and digital banking are disrupting banking operations. New-age banking apps offer lower fees and better user experience, which may increase their popularity and threaten FHB’s customer base.
  • Competition: Other larger national banks or credit unions could make substantial investments that allow for expansion in FHB’s current market and attempt to lure customers away.
  • Economic Cycles: As a lending institution, FHB is susceptible to economic down turns which can lead to lower lending volume and potential loan losses.
  • Interest Rate Risk: FHB relies heavily on spread-based profits (the difference between what is paid for deposits and what they earn by lending out those deposits). Therefore, large swings in interest rates can reduce or eliminate this profit. The 2023 interest rate increases also impacted the bond and treasury market which FHB has large investments in.
  • Geographic Concentration: A large portion of FHB’s assets are related to property and businesses located in Hawaii and adjacent areas. Any regional economic or natural disaster that greatly affects the region could cause a large decline in FHB’s balance sheets.
  • Regulatory Changes: Any new or changes to banking regulations in areas like Hawaii may have significant adverse impact on the company’s ability to operate and earn profits.

Financial Discussion

Analyzing FHB’s financials reveals:

Note: All reported figures are for Q3 2023 ended Sept 30th and for year-to-date ending Sept 30th unless otherwise stated. These figures are in millions of USD.

  • Net Interest Income: Total net interest income was $157 million for the quarter ending in September 2023, an increase of $6.6 million (4.3%). For the nine months ending in Sept 2023, it was $484.9 million.
  • Net interest income from Retail Banking for 9 month ended September 30 was $318.4 million.
  • Net interest income from Commercial Banking for 9 month ended September 30 was $91.4 million.
  • Net interest income from Treasury and Other was $74.9 million.

The rise in interest income was driven by increased yields on interest-earning assets, with average interest rates on loans increasing from 4.42% to 5.67%. However, rates of increase on interest-bearing deposits was much faster during this period.

  • Non-Interest Income: FHB recorded $55 million in Non-Interest income in 3 months ending in September 2023. Year-to-date in 2023, FHB recorded $171.9 million in Non-Interest income.
  • Primary contributors were deposit related fees, service charges and ATM fees.
  • Net Income: For the three months ended September 30, 2023, the net income available for common shareholders was $91.9 million, or $0.65 per share. For the nine-months ending in September 2023, net income was $289.1 million.
  • Operating Expenses: Non-interest expense for the 3 months ended in September 2023, was at $112.2 million with the main factors being in personnel, occupancy, and technology. For the nine months of 2023, operating expenses were $335 million.
  • Credit Quality: Non-performing assets continue to be low, the ACL ratio in 2023 declined to 1.22%, due to the strong economy and lack of defaults, it had been 1.52% in 2022.
  • Book Value: Book value of shares in FHB is reported at $20.46 per share on December 31st, 2022, and is estimated to be slightly more at $21.01 per share on September 30, 2023.

FHB’s operating and loan metrics appear very strong, however, some of the increases in revenue and earnings are not sustainable because they are coming largely from an increase in the interest rates as a whole and may decline, or reverse if rates decrease.

Understandability Rating: 2/5

The business model of FHB is relatively straightforward as it involves core banking functions like taking deposits and lending. However, financial statements of banks require significant financial knowledge, due to their complexity and high leverage. Also, the relationship between market interest rates, spreads, credit quality, and provisions will be difficult for the average person to quickly analyze and comprehend.

Balance Sheet Health: 4/5

  • Capitalization: The Company’s Tier 1 Capital Ratio was 12.47% as of September 30th, 2023. All their regulatory ratios remain well above what is required.
  • Strong Reserves: The allowance for credit losses (ACL) is 1.22%, which is a good safety metric. Loan loss levels have remained historically low, even through the COVID-19 period.
  • Low Leverage: FHB does not have unusually high levels of debt, and the loan to deposit ratio is slightly less than 1:1, as it is a bank that mostly relies on low-cost deposits for funds.
  • High quality loan book: Credit is generally investment grade and is highly collateralized by properties and other collateral, making their exposure to credit risk much less than other banks.

Recent Controversies and Problems

  • Impact of Increased Interest Rates: Like most other banks, FHB’s recent performance has benefited from the increased interest rates. This raises concerns about sustainability since further increasing interest rates will only increase the likelihood of recession and cause a drop in loan demand. Lowering rates will make their net interest margin smaller.
  • On the Q3 2023 earnings call, management states they believe they can increase net interest income even if the fed cuts rates by keeping costs of deposits lower than the drop in earning yields and that this will be a slower more gradual shift than the previous rate increase.
  • Regional Economic Issues: Economic conditions and market volatility, primarily in Hawaii, have the potential to impact their financials.
    • Management is monitoring economic indicators for a sign of the economy slowing down, but their base case is still that the region will have some growth in 2024 and beyond.
  • Regulatory scrutiny: All banks, but especially those with significant holdings in treasury bonds, are now facing intense scrutiny from regulatory authorities that may impose new reporting or reserve requirements.
  • Management believes that current balance sheet position is very strong and that they are proactively working with regulatory agencies to meet their demands.
  • They also point out that the increase in regulatory requirements is a net positive for them, making other less well capitalized banks to struggle.