Hancock Whitney Offers Value, But Catalysts Will Be Lacking For A Little While Longer

It’s probably stating the obvious to note that these are challenging times for banks, as loan growth continues to soften, credit costs continue to rise, and loan repricing is more than offset by higher funding costs. Unfortunately for Hancock Whitney (NASDAQ:HWC), there’s not a lot the company has in hand to offset these pressures, and the shares have lagged the weak regional bank sector since my last update – declining around 27% versus 22% for the larger group, though more or less matching its large in-market peer Regions Financial (RF).

I do think that Hancock Whitney shares are undervalued, but I also think that the regional bank group probably won’t really work as stocks until the Street is confident that the Fed is about to turn from tightening to loosening – while actual rate cuts aren’t likely until the second half of 2024, these stocks often move in anticipation of such shifts. A lack of company-specific drivers of outperformance is a definite concern, though I think the valuation still merits a positive stance.

Absent A Pre-Announced Charge-Off, The Quarter Was Basically As Expected

Hancock Whitney’s third quarter results were fairly undramatic, which is really about the best that most regional banks will do absent more aggressive restructuring efforts.

Revenue declined 3% year over year and less than 1% quarter over quarter, meeting expectations. Interest income fell 4% yoy and 2% qoq, driven by a small contraction in net interest margin (down 3bp qoq to 3.27%) and a small decline in earning assets (down almost 2%). Non-interest income rose 1% yoy and about 3.5% qoq with nothing too notable among major line-items like service charges, trust fees, and card fees.

Operating expenses rose 6% yoy and 1% qoq, with the bank seeing the same cost pressures (wages, et al) as the sector as a whole. It’s early in the reporting cycle, but I do have some concerns that the 460bp yoy increase in efficiency ratio (100bp qoq) won’t so great next to its rivals – the overall level of expenses here is okay (a 57% ER), but in an environment where spread income growth is so limited, operating efficiency becomes all the more important.

Pre-provision profits declined 12% yoy and 3% qoq, and again I think this will ending up sorting out as a “not great, but okay” sort of performance on a relative basis. Tangible book value per share rose 14% yoy and declined 2% qoq, and the company is well-capitalized at a CET1 ratio of just over 12%.

Weak Core Loan Growth, But Deposit Pressures Seem To Be Easing

Balance sheet performance was definitely mixed, with weaker overall core performance than I’d have liked to see.

Loans rose 1% qoq on both an end-of-period and average basis, but loans were supported by the conversion of completed construction projects to commercial real estate and mortgage loans. C&I lending was up 1.7% yoy, better than the market overall, but down slightly on a sequential basis, while CRE lending growth (6% yoy and 4% qoq) was boosted by the conversion of completed construction projects. Construction lending was up 5% yoy and down 9% qoq.

Loan yields improved 20bp from the prior quarter (to 6.01%), which is fairly typical and comes despite outsized growth in lower-yielding residential mortgages. New loans are going onto the books at rates above 8%, up about 60bp from the prior quarter and Hancock will continue to see a tailwind from loan repricing through most of the next year.

On the funding side, Hancock actually did pretty well. Overall deposits rose 1% sequentially and non-interest-bearing deposit attrition was limited to less than 5% versus the prior quarter. Deposit costs rose another 34bp from the prior quarter (to 1.74%) and overall interest-bearing costs are only a little above average (2.84%). I’d also note that at around 38%, Hancock enjoys a comfortably above-average skew to NIB deposits. Cumulative interest-bearing deposit beta increased to 53%, likely around average to slightly below average for the group this quarter.

Credit was mixed, but still okay on balance. The non-performing asset ratio improved slightly on a sequential basis (down 7bp to 0.27%), but charge-offs spiked (up 58bp qoq) to do a single bad credit in the syndicated loan book (accounting for 50bp of the rise). This is a known risk for syndicated loan participation (about 11% of the loan book) and Hancock wasn’t alone this quarter in taking a charge due to this credit failure.

Hancock does have elevated office real estate exposure at around 7%, but it’s important to note that about half of that is owner-occupied and about a third of the overall office book is medical offices (less economically-sensitive and not exposed to work-at-home). Moreover, Hancock doesn’t really lend to sizable high-rise developers where occupancy issues (and weaker appraisals) are more of an issue today.

The Outlook

My biggest concern with Hancock is that there’s just not a lot to differentiate the business in a market that has little interest in regional banks. I don’t see evidence that the bank is really grabbing high-quality loan share, and I don’t think there’s much the bank can do in terms of significant efficiency/cost programs to offset spread pressures. On top of that, you do have some pressure (more on the sentiment side than operational) from the bank’s leverage to syndicated lending (around 11% of the book), retail (around 8%), and office.

As has been the case with almost all banks, my outlook for 2023-2025 earnings is considerably lower than before as the banks absorb even more pressure on funding, as well as weak loan growth and rising credit costs. I’m still looking for around 4% long-term core earnings growth, but 2024 is likely to see another weak set of numbers (down high single-digits) before relief from lower funding costs and improved loan demand boost earnings in 2025.

Discounted back, my long-term core earnings still support a fair value in the high-$40’s. ROTCE-driven P/TBV and P/E likewise support a mid-to-high-$40’s fair value, including a 1.6x P/TBV multiple and a 10x multiple on FY’24 EPS (which I estimate at $4.66 today).

The Bottom Line

Valuation and my belief that Hancock Whitney has a high-quality bank franchise in an attractive footprint supports a positive view. That’s countered by a lot of metrics where the bank looks more or less average, and I don’t think “average” is going to drive outperformance in the near future. Given my belief that regional banks are meaningfully mispriced, though, I still think these shares are worth owning.