Hancock Whitney Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Hancock Whitney Corporation is a financial holding company primarily operating as a bank, offering a range of services like commercial, financial, and retail banking, in locations mostly throughout the Southeastern United States, particularly in Florida, Mississippi, Louisiana, Texas and Alabama.

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.

Business Overview: HWC operates as a traditional bank, offering services like lending, accepting deposits, and managing trusts.

  • Revenue Distribution: HWC’s revenue is primarily driven by net interest income (NII) from loans and securities, as well as non-interest income generated from services and fees.
  • Industry Trends: The banking industry is facing rising interest rates which could cause some pressures on deposits and loans. There is also the threat of potential increased regulation. Many banks are turning to new technologies to meet customer needs while keeping costs low.
  • Margins: HWC’s margins are influenced by factors like the interest rate environment, and the competitiveness of the banking market. Banks can see increased margins when rates are rising and the yield curve is steep, but also face increased deposit costs during that same time period.
  • Competitive Landscape: The banking industry is highly competitive, with numerous local, regional, and national banks vying for customers. HWC competes against larger banks and with smaller niche players.

Latest Information and Management’s View

  • Earnings & Outlook: HWC’s Q1 2024 earnings showcased a decline in net interest income which was offset by improvement in other income sources and a decrease in provision for credit losses. Management expects the economic outlook to continue to cause some pressures. The Bank’s CFO indicated during a recent earnings call that they anticipate further interest rate hikes in the near term and believe they will have to be thoughtful in making decisions regarding their balance sheet and the loans and deposits it hold.
  • Loan Quality: The company has seen that loan quality is holding up in the current environment, with only slight increases in criticized loans. They are being deliberate in their portfolio management. They also have a strong credit risk and management team.
  • Technology: Management is actively trying to incorporate new technology and data analysis for better risk analysis and overall profitability. They are also focused on improving mobile capabilities for their customers.
  • Strategic Priorities: The bank is focused on maintaining a strong balance sheet and is trying to be more efficient and generate better returns. They are also looking to enhance their data analytics capabilities, which can help them with the bank’s credit quality.
  • Asset Quality Concerns While non-performing loans remain below historical levels, they have increased relative to recent lows. Additionally, concerns around commercial real estate loans have been highlighted, but management insists they have adequate reserves and are working diligently to mitigate that risk.
  • Economic Outlook While the bank has performed well in the face of economic uncertainty, management acknowledged that high interest rates and reduced liquidity may make it more difficult for them to continue generating strong growth. Management has also suggested that they will be cautious when assessing risk in the next few quarters.

Financials In-Depth:

  • Earnings: HWC has produced relatively good profits in the latest reports, but the revenue and profits are being affected by market conditions and the high competition. The company is also looking to improve its margins and overall profitability in the future.
  • Balance Sheet: HWC’s balance sheet shows an asset-liability mix consistent with a traditional bank. Loan quality is currently stable. However, the bank is carrying a significant amount of debt which makes their profitability susceptible to interest rate fluctuations.
    • Assets: The bank has a significant portion of its assets tied to loans and securities. There have been some decreases in non-performing assets, but the value of securities is still slightly affected by market values.
    • Liabilities: Deposits make up most of the liability side.
    • Equity: Equity makes up less than 10% of the overall balance sheet, which can be considered low.
  • Cash Flows: HWC has been making use of free cashflow to return money back to its shareholders and has also been investing some of the cash into new tech and development.
  • ROIC: Historical return on invested capital has been in the single-digit range, not too impressive.

Moat Analysis: While HWC has some positive attributes, such as a strong presence in its chosen regions and has been building out customer facing technology, it faces intense competition from other banks. Here’s the breakdown of its moat rating:

  • Brand: HWC is a regional bank, which although has a loyal customer base doesn’t boast brand recognition in a manner that would establish an advantage, and may be considered a slightly niche brand.
  • Switching Costs: Although changing banks is not something customers do on a regular basis, there are no real switching costs for the bank’s clients, especially the retail clients. Commercial clients are more likely to be affected by switching costs.
  • Network Effects: Banks do not inherently benefit from network effects.
  • Cost Advantage: HWC doesn’t have a tangible cost advantage, which is evident from the fact that the bank’s returns on invested capital have been in the single-digit region historically.
  • Durability: With all the above mentioned points and the fact that competition is getting more intense, it is hard to argue that HWC’s business has a wide moat, but is more realistically described as a business with no to a narrow moat, thus a moat score of 2.

Understandability Rating: 2 / 5 HWC’s business model can be somewhat tricky, especially regarding its investments and different areas of business it has. Therefore a rating of 2 is given, however its financials are not too difficult to understand.

  • Traditional banking is very difficult to get into, but it’s quite easy to see what is happening with it, since financials are straightforward.
  • A lot of terminology from the financial industry may confuse an inexperienced investor.
  • Different drivers of revenue might be hard to understand.

Balance Sheet Health Rating: 3 / 5 HWC’s balance sheet is a cause for some concern. Although, their asset quality is not bad, and they don’t have a massive portfolio of problem assets, there are some points of concerns:

  • Current levels of debt make the company susceptible to interest rate fluctuations.
  • Equity makes up less than 10% of the overall balance sheet, which can be deemed as low.
  • A large number of loan modifications may lead to losses in the near term.

In conclusion, while HWC has a long history, it has a very susceptible moat and financials are quite complex. This business will require constant scrutiny.