Hancock Whitney Stock: Generating Results That Outperform the Market (NASDAQ:HWC)

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I loved Hancock Whitney (HWC) in July due to its combination of valuation, leverage for loan growth resuming in 2022 and potential for self-help on spending. Although the COVID-19 pandemic has still had negative impacts on the company’s major markets, the company has nonetheless performed well and shares have risen nearly 25% since that last article – easily beating not only the S&P 500, but also regional banks. as a group.

I still like the Hancock story, and I think the combination of loan growth, expense leverage, and rate leverage will serve the company well. While expectations are a bit higher now and I have some concerns about year-over-year growth in pre-provision earnings for 2022, I still see double-digit upside for this name, and I considers it as a tracked sub-name in the regional bank space.

Walk on water before improving operating conditions

Reported operating profit was better than expected for the fourth quarter (about $0.10 to $0.16/share depending on how you adjust the reported numbers), but revenue was still down, pre-provision earnings were flat sequentially and pre-provision earnings fell about a penny, with the benefit coming from other items like lower supply.

Revenue was down 2% yoy and nearly 3% yoy, with lower net interest income (down 4% yoy and 2% yoy) driving weakness. Spread income was around 1% weaker than Street expected as excess liquidity again weighed heavily on results – net interest margin fell 14bps QoQ (to 2. 80%), missing 9bps, and management said 10bps of the 14bp squeeze was attributable to excess liquidity.

Commission revenue was up 4% year-over-year and down 3% quarter-on-quarter on a basic basis, coming in slightly higher than expected.

Core expenses were down 5% yoy and 4% yoy, beating expectations and reinforcing revenue shortfalls, so pre-provisioning earnings (up more than 2% yoy and flat in quarter-on-quarter) barely exceeded expectations.

Signs of life in loans

Excluding PPP loans, Hancock recorded 3% quarter-on-quarter growth in loans, doing slightly better than the broader banking sector. Hancock hasn’t seen quite the recovery in C&I lending that other southeastern banks like Regions (EN) and Truist (TFC) did, but lending in this category was up 2% year-on-year and commercial line utilization improved more than two points from the prior year period to reach just under 40%. Similar to the regions, Hancock management noted strength in equipment and healthcare financing, and overall demand for loans is increasing as companies feel more confident about expanding their businesses.

Between improving demand across its operational footprint, new hires, and efforts to selectively expand lending verticals, I’m quite pleased with management’s forecast for 6% to 8% loan growth in 2022. At a minimum, this will help absorb some excess cash, although I also expect management to be opportunistic with stocks as the year progresses.

On rates/spreads, I think it’s interesting that management isn’t assuming any Fed rate hikes in its forecast – most banks are assuming two or more rate hikes in 2022. On an “as is” basis, management believes NIM will stabilize by mid-year and then begin to improve.

I think “as is” is a conservative outlook, and management provided additional color on potential rate leverage. Hancock management expects an immediate 100 basis point move would drive net interest income growth of more than 7%, positioning Hancock as a bank with slightly above-average rate sensitivity. Of course, a 100bp shock hike is not at all likely, and a more gradual 100bp hike would have a more modest impact (+3% for net interest income).

A key unknown in sensitivity to Hancock rates is the stickiness of the deposits that poured in during the pandemic. Historically, Hancock has benefited from persistent high-quality deposits, but I think higher deposit betas (deposits going in search of higher returns) are a sector risk for this tightening cycle.

Perspectives

Hancock is in good shape with respect to capital (a CET1 ratio of 11.2%), and I think the bank could look to be more active in mergers and acquisitions and/or capital returns to shareholders. The market hasn’t reacted well to bank mergers and acquisitions, especially deals that dilute tangible book value in the short term, but I think there could be some opportunities for Hancock to add either exposure market-specific (buying a small bank or two with a significant deposit share in a target market) or product exposure (buying a bank or non-bank lender with expertise in a growing lending vertical ).

I also think Hancock enters 2022 in good shape when it comes to spending. Hancock has been slower to act on spending, but a comprehensive program is underway and is already starting to bear fruit. Several banks have sold this reporting cycle due to higher 2022 spending forecasts, but Hancock may be one of the few banks to show lower operating expenses (and positive operating leverage) in 2022.

In addition to this expense leverage, Hancock may still have gas in the reservoir where reserve releases are being considered. The bank’s loan loss provision was down another 20bps to 1.8% this quarter, but this remains well above the CECL Day 1 level of 1.3% (and

Between improved loan growth, improved spending leverage, rate sensitivity and reserve releases, I raised my earnings expectations for Hancock. Where I was previously looking for long-term core earnings growth of 5% to 6%, I am now at 6% to 7%; FY22 won’t be a big year of growth on an annual basis (although rate hikes and reserve releases may produce some upside), but growth should pick up later in the year and into 2023 .

The essential

I still see double-digit annualized total return potential based on my base income/excess return model, my ROTCE-P/TBV model, and my P/E model. An 11.5x multiple on FY23 earnings would support a fair value in the $60s and not represent a premium to where most regional banks currently trade. While Hancock doesn’t have the best operational footprint, I don’t think it deserves a substantial discount given the leverage of spending and loan growth, and I think there are still benefits here.

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