Hancock Whitney Stock: Drives Market-Beating Results (NASDAQ:HWC)
I liked Hancock Whitney (HWC) back in July due to its combination of valuation, leverage to loan growth recovery in 2022, and self-help potential on expenses. While the COVID-19 pandemic has still had some negative impacts on the company’s core markets, the business has nevertheless been executing well and the shares are up almost 25% since that last article – handily beating not only the S&P 500, but also regional banks as a group.
I still like the story at Hancock, and I think the combination of loan growth, expense leverage, and rate leverage will serve the company well. While expectations are quite a bit higher now, and I do have some concerns about the year-over-year growth in pre-provision profits for 2022, I do still see double-digit upside for this name, and I consider it an under-followed name in the regional bank space.
Treading Water Ahead Of Improving Operating Conditions
Reported operating earnings came in better than expected for the fourth quarter (by about $0.10 to $0.16/share depending on how you adjust the reported numbers), but revenue did still shrink, pre-provision profits were flat sequentially, and pre-provision profits missed by about a penny, with the upside coming from other items like lower provisioning.
Revenue declined 2% yoy and almost 3% qoq, with weaker net interest income (down 4% yoy and 2% qoq) driving the weakness. Spread income was about 1% weaker than the Street expected, as excess liquidity once again weighed heavily on results – net interest margin declined 14bp qoq (to 2.80%), missing by 9bp, and management indicated that 10bp of the 14bp compression was attributable to excess liquidity.
Fee income rose 4% yoy and declined 3% qoq on a core basis, coming in a bit higher than expected.
Core expenses declined 5% yoy and 4% qoq, beating expectations and shoring up the missing revenue such that pre-provision profits (up more than 2% yoy and flat qoq) just barely missed expectations.
Signs Of Life In Lending
Excluding PPP loans, Hancock saw 3% qoq growth in lending, doing a little better than the broader banking sector. Hancock didn’t see quite the pick-up in C&I lending that other Southeastern banks like Regions (RF) and Truist (TFC) did, but lending in this category did grow 2% qoq and commercial line utilization improved more than two points from the year ago period to just under 40%. Like Regions, Hancock management noted strength in equipment finance and healthcare, and overall loan demand is picking up as businesses feel more confident about expanding their businesses.
Between improving demand in its operating footprint, new hires, and efforts to selectively expand lending verticals, I feel pretty good about management’s guidance for 6% to 8% loan growth in 2022. At a minimum, that will help soak up some of the excess liquidity, though I’d also expect management to be opportunistic with securities as the year goes on.
Looking at rates/spreads, I think it’s interesting that management is not assuming any Fed rate hikes in its guidance – most banks are guiding with assumptions of two or more hikes in 2022. On an “as is” basis, then, management believes NIM will stabilize around midyear and then start improving.
I think “as is” is a conservative outlook, and management did provide some additional color on potential rate leverage. Hancock management projects that an immediate 100bp move would drive more than 7% net interest income growth, placing Hancock as a bank with modestly above-average rate sensitivity. Of course, a 100bp shock increase isn’t at all likely, and a more gradual 100bp increase would have a more modest impact (+3% for net interest income).
A key unknown in Hancock’s rate sensitivity is the stickiness of deposits that flooded in during the pandemic. Historically Hancock has benefited from sticky high-quality deposits, but I do think higher deposit betas (deposits leaving in search of higher returns) are a sector-wide risk for this tightening cycle.
Hancock is in good shape with respect to capital (a CET1 ratio of 11.2%), and I believe the bank could look to be more active in M&A and/or capital returns to shareholders. The market has not responded well to bank M&A, particularly deals that bring near-term tangible book value dilution, but I believe there could be some select opportunities for Hancock to add either specific market exposure (buying a small bank or two with meaningful deposit share in a target market) or product exposure (buying a bank or non-bank lender with expertise in a growing loan vertical).
I also think Hancock is going into 2022 in good shape with respect to expenses. Hancock was slower to act on expenses, but there’s a comprehensive program underway now that is already starting to pay dividends. Several banks have sold off in this reporting cycle due to higher expense guidance for 2022, but Hancock could be one of the relatively few banks to show lower operating expenses (and positive operating leverage) in 2022.
On top of that expense leverage, Hancock may still have some gas in the tank where reserve releases are considered. The bank’s allowance for loan losses declined another 20bp to 1.8% this quarter, but that’s still well above the CECL Day 1 level of 1.3% (and <1% excluding energy loans that are no longer on the books). With underlying metrics like non-performing and criticized loans improving, that could be another source of reported earnings upside in 2022.
Between improving loan growth, improving expense leverage, rate sensitivity, and reserve releases, I’ve boosted my earnings expectations for Hancock. While I was previously looking for 5% to 6% long-term core earnings growth, I’m now at 6% to 7%; FY22 is not going to be a great growth year on a yoy basis (though rate hikes and reserve releases could produce upside), but growth should pick up later in the year and through 2023.
The Bottom Line
I still see double-digit annualized total return potential on the basis of my core earnings/excess return model, my ROTCE-P/TBV model, and my P/E model. A 11.5x multiple on FY23 earnings would support a fair value in the low $60’s and wouldn’t represent a premium over where most regional banks trade now. Although Hancock doesn’t have the best operating footprint, I don’t think it deserves a substantial discount given expense leverage and loan growth, and I think there’s still upside here.