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Hope Bancorp Stock: Loan Growth To Continue To Support Earnings

kool99

Earnings of Hope Bancorp, Inc. (NASDAQ:HOPE) will most probably continue to surge next year on the back of moderately high loan growth. Further, some margin expansion will help earnings next year. Overall, I’m expecting Hope Bancorp to report earnings of $1.87 per share for 2022 and $1.95 per share for 2023. Compared to my last report on the company, I haven’t changed my earnings estimates much. Next year’s target price suggests a high upside from the current market price. Therefore, I’m maintaining a buy rating on Hope Bancorp.

Loan Growth to Dip to a More Normal Level

Hope Bancorp’s loan production was at a record high during the third quarter with the loan portfolio growing by 6.5% during the quarter, or 26% annualized. The management gave credit for the loan additions to recent investments in the corporate banking group, which is responsible for commercial loans, as mentioned in the conference call.

A headwind for future loan growth is the high interest-rate environment which will temper credit demand, especially in the residential mortgage segment. Thankfully, residential mortgages are not a big focus area for Hope Bancorp. Residential mortgages made up just 5% of total loans at the end of September 2022.

Further, the management mentioned in the conference call that it has started being more selective in originating loans as the expected recession draws closer.

On the other hand, strong job markets will likely support loan growth. Hope Bancorp is a nationwide lender with a focus on businesses owned by Korean Americans. Therefore, the national unemployment rate is an apt predictor of credit demand. As shown below, unemployment has remained near decade lows throughout this year.

Chart
Data by YCharts

Considering these factors, I’m expecting the loan portfolio to grow by 2% in the last quarter of 2022, taking full-year loan growth to 13%. For 2023, I’m expecting the loan portfolio to grow by 8%. Further, I’m expecting deposits to grow in line with loans. The following table shows my balance sheet estimates.

Financial Position FY18 FY19 FY20 FY21 FY22E FY23E
Net Loans 12,006 12,182 13,356 13,812 15,637 16,926
Growth of Net Loans 9.0% 1.5% 9.6% 3.4% 13.2% 8.2%
Other Earning Assets 2,316 1,868 2,486 2,853 2,478 2,579
Deposits 12,156 12,527 14,334 15,040 15,812 17,116
Borrowings and Sub-Debt 1,118 927 559 622 1,469 1,529
Common Equity 1,903 2,036 2,054 2,093 1,966 2,083
Book Value Per Share ($) 14.5 16.0 16.6 17.0 16.4 17.4
Tangible BVPS ($) 10.8 12.3 12.7 13.2 12.5 13.4
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

Topline’s Rate Sensitivity, New Loan Originations to Boost the Margin

The net interest margin grew by 13 basis points in the third quarter and 15 basis points in the second quarter of 2022 thanks to the rising rate environment. The margin will rise further in future quarters because of the impact of the 375-basis point hike in the fed funds rate so far this year. Moreover, I’m expecting another 75 basis points hike till the mid of 2023.

Hope Bancorp’s top line is quite rate-sensitive thanks to the loan and deposit mixes. Variable-rate loans made up 46% of total loans at the end of September 2022, as mentioned in the earnings presentation. Therefore, the average loan portfolio yield is moderately rate-sensitive in the near term. In comparison, interest-bearing demand and savings accounts made up 40% of total deposits at the end of September 2022. These deposits reprice soon after every rate hike.

The results of the management’s interest-rate sensitivity analysis given in the 10-Q filing show that a 200-basis points hike in interest rates could boost the net interest income by 6.53% over twelve months.

Interest Rate Sensitivity Analysis Hope Bancorp

3Q 2022 10-Q Filing

Further, new loan originations can help the margin. Hope Bancorp originated new loans at a high rate of 5.37% during the third quarter, as mentioned in the presentation. This rate is much higher than the average portfolio yield of 4.65% during the third quarter, as mentioned in the 10-Q filing. Therefore, loan additions will most probably boost the average earning-asset yield, and consequently the margin, in future quarters.

However, the management expects slight margin compression in the fourth quarter of 2022, as mentioned in the presentation. Catching-up of deposit costs to the market interest rates and seasonality factors will be responsible for the margin attrition.

Overall, I’m expecting the margin to dip by two basis points in the last quarter of 2022 and increase by ten basis points in 2023.

Earnings to Grow by 4% Next Year

The anticipated, moderately high loan growth will act as the chief catalyst for earnings through the end of 2023. The bottom line will also receive some support from margin expansion. Meanwhile, the provisioning for expected loan losses will likely remain at a normal level. I’m expecting the net provision expense to make up 0.19% of total loans in 2023, which is the same as the average for the last five years.

Overall, I’m expecting Hope Bancorp to report earnings of $1.87 per share for 2022, up 12% year-over-year. For 2023, I’m expecting earnings to grow by 4% to $1.95 per share. The following table shows my income statement estimates.

Income Statement FY18 FY19 FY20 FY21 FY22E FY23E
Net interest income 488 467 467 513 585 667
Provision for loan losses 15 7 95 (12) 9 32
Non-interest income 60 50 53 44 53 51
Non-interest expense 278 283 284 293 326 372
Net income – Common Sh. 190 171 112 205 224 234
EPS – Diluted ($) 1.44 1.35 0.90 1.66 1.87 1.95
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

In my last report on Hope Bancorp, I estimated earnings of $1.87 per share for 2022 and $1.97 per share for 2023. My updated earnings estimates are barely changed because the tweaks I’ve made to the income statement line items cancel each other out.

My estimates are based on certain macroeconomic assumptions that may not come to pass. Therefore, actual earnings can differ materially from my estimates.

High Total Expected Return Justifies a Buy Rating

Hope Bancorp has maintained its quarterly dividend at $0.14 per share since the second half of 2018. The earnings and dividend estimates suggest a payout ratio of 29% for 2023, which is below the five-year average of 45%. Therefore, there is a chance that Hope Bancorp will finally raise its dividend next year. Nevertheless, to remain on the safe side, I’m expecting no change in the dividend level in 2023. Based on my dividend estimate, Hope Bancorp is offering a forward dividend yield of 4.1%.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Hope Bancorp. The stock has traded at an average P/TB ratio of 1.12 in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
T. Book Value per Share ($) 10.7 10.8 12.3 12.7 13.2
Average Market Price ($) 15.5 14.6 12.5 9.1 14.0
Historical P/TB 1.45x 1.35x 1.01x 0.71x 1.06x 1.12x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple with the forecast tangible book value per share of $13.4 gives a target price of $15.0 for the end of 2023. This price target implies a 10.3% upside from the December 1 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple 0.92x 1.02x 1.12x 1.22x 1.32x
TBVPS – Dec 2023 ($) 13.4 13.4 13.4 13.4 13.4
Target Price ($) 12.3 13.7 15.0 16.3 17.7
Market Price ($) 13.6 13.6 13.6 13.6 13.6
Upside/(Downside) (9.4)% 0.4% 10.3% 20.2% 30.1%
Source: Author’s Estimates

The stock has traded at an average P/E ratio of around 10.6x in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
Earnings per Share ($) 1.03 1.44 1.35 0.90 1.66
Average Market Price ($) 15.5 14.6 12.5 9.1 14.0
Historical P/E 15.1x 10.1x 9.2x 10.1x 8.4x 10.6x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the forecast earnings per share of $1.95 gives a target price of $20.6 for the end of 2023. This price target implies a 51.5% upside from the December 1 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 8.6x 9.6x 10.6x 11.6x 12.6x
EPS 2023 ($) 1.95 1.95 1.95 1.95 1.95
Target Price ($) 16.7 18.7 20.6 22.5 24.5
Market Price ($) 13.6 13.6 13.6 13.6 13.6
Upside/(Downside) 22.8% 37.2% 51.5% 65.8% 80.1%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $17.8, which implies a 30.9% upside from the current market price. Adding the forward dividend yield gives a total expected return of 35.0%. Hence, I’m maintaining a buy rating on Hope Bancorp.

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