Hancock Whitney Stock: Remains Undervalued With Cost Pressure Easing (NASDAQ:HWC)

Hancock Whitney (NASDAQ:HWC) has been a relatively quiet performer since my last update in the summer, with shares of this Southeastern lender underperforming regional bank peers to varying degrees depending on which index you use.

Alongside its peer group, Hancock was staring fund cost headwinds square in the face the last time I covered it, and though the stock looked inexpensive, catalysts for a re-rate were not really there. Two quarters on, Hancock’s relatively muted share price performance still leaves it looking cheap, while there is good reason to believe the worst of its cost pressures are behind it given that net interest income (“NII”) and margin both came in flat last quarter. While the near-term outlook isn’t exactly stellar, Hancock still has a good blend of quality and value going for it, and I maintain my Buy rating on the stock.

Buy Case Recap

Based in Gulfport, Mississippi, Hancock is active across the Southeast, with operations in Texas, Louisiana, Florida and Alabama in addition to its home state. Like many regionals, Hancock is essentially a NII bank, with this source of income accounting for approximately 75% of its top line. Total assets stood at roughly $35.5b at the end of last year.

To quickly recap from previous coverage, my Buy case here essentially consisted of the following:

• Hancock possesses an above-average quality deposit franchise, with non-interest-bearing (“NIB”) balances still accounting for over 35% of the mix at the end of 2023. In total, customer deposits fund around 85% of Hancock’s assets, with this strong funding position ultimately resulting in above-average profitability.
• Hancock traded for around 1.4x tangible book value per share (“TBVPS”) at the time of my last update. Although facing headwinds, the bank was still good for a circa mid-teens return on tangible common equity (“ROTCE”), meaning this valuation was still quite reasonable despite looking punchy at first glance.

Further Signs Of NIM Stabilization

Sharply higher funding costs and moderating demand for credit were obviously major headwinds for regional bank stocks last year, and Hancock was no exception, with the bank still seeing significant downward pressure on its net interest margin (“NIM”) at the time of my last update in Q3 2023.

The good news is that things are now settling down. While NIB balances did decline another 5% quarter-on-quarter in Q4 on an end-of-period basis, these still account for a very healthy 37% of Hancock’s overall deposits, ultimately funding around one-third of its assets. At the same time, funding cost pressures are showing further signs of moderating. Hancock paid a blended average rate of 3.08% on interest-bearing deposits last quarter, up 24bps sequentially, but an improvement on the 45bps sequential increase reported in Q3. As a result, overall funding costs are rising at a slower pace. Total deposit costs increased 19bps quarter-on-quarter in Q4 to 1.93%, improving on the 34bps rise in Q3 (which itself represented a slight slowdown compared to Q2). Importantly, month-on-month trends also continued to improve sequentially throughout Q4.

While loan and overall earning asset growth are anaemic, Hancock is still seeing a tailwind as these continue to reprice to the higher rate environment. Average loan balances were virtually flat sequentially in Q4 at ~$23.8b, but the average rate increased by 10bps to 6.11%. Similarly, while overall average earnings assets were essentially flat quarter-on-quarter at ~$33.1b, average rate increased 14bps to 5.16%. As a result, overall net interest income and margin were broadly stable last quarter, with Q4 NIM of 327bps down 41bps year-on-year but flat sequentially.

With cost pressure easing, Hancock does have some levers to pull in terms of growth in 2024. Demand for credit doesn’t look great given the broader environment, but the bank could still see a tailwind from higher yields, including in its asset portfolio. Hancock reported an average yield of 2.47% on its $7.6b securities portfolio last quarter, up 10bps quarter-on-quarter but still well below the rate it can put current maturities to work at. Similarly, new loans were coming on the book at a rate of 8.15% in Q4, around 2ppt higher than the average rate its loan book was generating in Q4. This should be a modest tailwind to NII in 2024.

Still Highly Profitable Under The Hood

Hancock’s Q4 figures were somewhat muddied by a number of one-time items, with a net loss on asset sales as well as a FDIC special assessment charge relating to last year’s bank failures obscuring its core earnings power. With that, reported EPS was $0.58 last quarter, down around 50% sequentially and mapping to an annualized ROTCE of just 7.6%. However, EPS and ROTCE improve to $1.26 and 16.4%, respectively, when you strip out those various one-offs, so the bank remains very profitable under the hood.

Credit quality continues to be supportive to earnings and profitability. While net charge-offs look like they are normalizing, with NCOs landing at 0.27% annualized in Q4 (roughly in line with the pre-COVID 2018-19 average), nonaccrual loans were flat sequentially and at 0.25% of total loans they remain at historically low levels.

Looking at particular areas of market concern, I mentioned last time that non-owner commercial real estate (“CRE”) was around 15% of the loan book here. Within that, investor office loans of around $740m are around 3% of the book (~0.25x tangible common equity), however I would add that Hancock only has very small exposure to office towers in large urban centers – with these loans the largest source of concern within office CRE generally. Looking ahead, management expects “modest” charge-offs and provisioning this year, and with loan loss reserves at 1.4% of total loans (~520% of nonaccrual loans) asset quality remains something I am not overly concerned about.

Valuation Continues To Look Very Reasonable

Since I last covered it, Hancock’s TBVPS has increased by almost 10% to $33.63, while the share price is actually down a touch. As a result, the stock’s P/TBVPS multiple has contracted to around the 1.25x mark from 1.4x last time out.

Though still trading at a premium to TBVPS, this valuation looks attractive. Hancock has an okay history of growth, with TBVPS increasing at a circa 6% CAGR over the past half-decade or so. I would point out that within its Southeastern footprint, Hancock does have some exposure to faster growing markets like Houston and Tampa, while the bank would only have a dividend payout ratio of ~25% assuming it earns a circa 15% mid-cycle ROTCE. That should augur well for reasonable TBVPS growth in the years ahead.

Last time, I said that I was looking for an average ROTCE of around 15% from Hancock over the medium-term. This is actually around 3 points lower than management’s own three-year goal of an 18%-plus ROTCE by 2026.

On an 18% ROTCE, Hancock could theoretically distribute ~14% to shareholders on a 1.25x TBVPS multiple. That would fall to a still-attractive 12% based on a 15% ROTCE, and this is essentially why I still argue for multiple expansion here despite the stock trading at a premium to TBVPS. Last time, I said Hancock was ballpark fair value in the low-$50s per share region. At this price, Hancock could distribute around 9-10% to investors on a 15% ROTCE, which is around what most investors demand from equities.

Catalysts do remain thin in the near-term, though I expect the stock to move over the 1.5x TBVPS mark within the next few years. This is in line with its historical average and reflects the bank’s ROTCE profile, so it’s not an aggressive assumption by any means. Between multiple expansion, balance sheet growth and around 2.75% from the current dividend, these shares continue to offer double-digit annualized total returns potential over the medium-term, and I maintain my Buy rating on the stock.