Even during a down period for the markets, Bank of Hawaii has gone against the grain, climbing to $74.90. Its shares have yielded a 15.9% return over the last six months, beating the S&P 500 by 18.7%. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Bank of Hawaii, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Bank of Hawaii Not Exciting?
Despite the momentum, we're cautious about Bank of Hawaii. Here are three reasons there are better opportunities than BOH and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Two primary revenue streams drive bank earnings. While net interest income, which is earned by charging higher rates on loans than paid on deposits, forms the foundation, fee-based services across banking, credit, wealth management, and trading operations provide additional income.
Unfortunately, Bank of Hawaii’s 1.4% annualized revenue growth over the last five years was weak. This fell short of our benchmarks.
2. Net Interest Income Points to Soft Demand
Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.
Bank of Hawaii’s net interest income has grown at a 1.6% annualized rate over the last five years, much worse than the broader banking industry and in line with its total revenue. This was driven by its loan growth as its net interest margin, which represents how much a bank earns in relation to its outstanding loan book, declined throughout that period.
3. Low Net Interest Margin Reveals Weak Loan Book Profitability
Net interest margin (NIM) represents how much a bank earns in relation to its outstanding loans. It's one of the most important metrics to track because it shows how a bank's loans are performing and whether it has the ability to command higher premiums for its services.
Over the past two years, we can see that Bank of Hawaii’s net interest margin averaged a poor 2.3%, meaning it must compensate for lower profitability through increased loan originations.
Final Judgment
Bank of Hawaii isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 1.8× forward P/B (or $74.90 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
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