Hanmi Financial: Valued Attractiveness, Earnings Likely Flat (NASDAQ:HAFC)

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Earnings of Hanmi Financial Corporation (NASDAQ:HAFC) will likely be flat in both 2022 and 2023. Decent loan growth and slight margin expansion are likely to boost earnings. On the other hand, a proportional increase in operating expenses and the normalization of the provision the expenses will nearly cancel out the effect of the top line growth. Overall, I expect Hanmi Financial to report earnings of $3.26 per share for 2022 and $3.28 per share for 2023. Next year’s target price suggests a big upside over the current market price. Therefore, I am adopting a buy rating on Hanmi Financial Corporation.

Loan growth likely to remain close to historical average

Hanmi Financial Corporation’s loan growth has been quite impressive so far this year. The portfolio has grown 12.8% in nine months, or 17% annualized, which is extraordinary considering the history of the company. Growth was broad-based with a material contribution from the Corporate Korea initiative, as mentioned on the third quarter conference call. Management expects loan growth to return to historic levels in the second half of the year (mentioned on Q2 conference call and reiterated on Q3 conference call). Management also expects mortgage origination to moderate in the fourth quarter as higher interest rates “are now having an impact on the buyout and refinance markets,” as mentioned on the conference call.

On the other hand, dynamic labor markets are likely to boost economic activity and sustain credit demand. Hanmi Financial serves multi-ethnic communities in California, Texas, Illinois Virginia, New Jersey, New York, Colorado, Washington and Georgia. As these markets are quite diverse, it is best to consider the national average when trying to gauge credit demand. As shown below, the unemployment rate is near multi-decade lows.

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Data by YGraphics

Taking these factors into account, I expect the loan portfolio to grow 1.5% each quarter through the end of 2023. This will result in full-year loan growth of 14.5% for 2022 and 6.1% % by 2023. I expect deposits and some other balance sheet items to grow in line with loans. However, growth in the book value of the shares will face pressure from unrealized market value losses on the available-for-sale securities portfolio. The portfolio has already accumulated large losses because its market value has decreased as interest rates rise. The following table shows my balance estimates.

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fiscal year 2018 fiscal year 2019 fiscal year 20 fiscal year 21 FY22E FY23E
Financial situation
net loans 4,569 4,549 4,790 5,079 5,815 6,172
Net Portfolio Growth 6.9% (0.4)% 5.3% 6.0% 14.5% 6.1%
Other earning assets 601 657 762 924 846 872
Deposits 4,747 4,699 5,275 5,786 6,294 6,681
Loans and sub-debt 173 208 269 353 231 238
common equity 553 563 577 643 597 637
Book value per share ($) 17.2 18.3 19.1 21.1 19.7 20.9
Tangible BVPS ($) 16.9 17.9 18.7 20.7 19.3 20.6
Source: SEC filings, author’s estimates (in millions of dollars, unless otherwise specified)

Margin expansion to slow down

Hanmi Financial Corporation’s net interest margin expanded by 70 basis points, while the fed funds rate increased by 300 basis points in the first nine months of 2022. Following the 75 basis point increase in November, I expect a further increase of 75 basis points until mid-2023, which will further boost the margin in the coming months. Results of management’s interest rate sensitivity analysis provided in the second quarter 10-Q filing showed that a 200 basis point increase in interest rates could boost net interest income by 6.15%. in the first year and 10.9% in the second year. of the rate hike.

Sensitivity of the rate of net interest income

2Q 2022 Filing 10-Q

Some of the modest rate sensitivity is attributable to the loan mix. Some 54% of the loan portfolio (including fixed-rate loans) will change in price within a year, according to details provided in the third-quarter earnings release. Also, a large balance of non-interest bearing deposits will curb the cost of deposits in the current bull cycle. Non-interest bearing deposits represented 44.7% of total deposits at the end of September 2022.

New loan additions will also raise the average return on earning assets in the future. This is because the average interest rate for new loans produced was 5.55% during the third quarter of 2022, as mentioned in the presentation. This new loan rate is much higher than the average portfolio return of 4.39%, as mentioned in the earnings release.

However, Hanmi’s deposit mix has worsened in recent quarters as high loan growth created a funding gap that management had to bridge by promoting expensive deposits. As a result, time deposits increased to 18.5% of total deposits at the end of September 2022 from 15.2% of total deposits at the end of June 2022. Due to this recent change in the deposit mix , the deposit beta, or rate sensitivity, will increase moving forward

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Taking these factors into account, I expect the margin to increase by only five basis points in the last quarter of 2022 and eight basis points in 2023.

Earnings likely to be flat

The anticipated credit growth and slight margin expansion discussed above will likely support earnings through the end of 2023. On the other hand, an inflation-driven increase in operating expenses will drag earnings down. Additionally, I expect procurement spending to rise to the historical average in the coming months, which will put further pressure on earnings. Overall, I expect Hanmi Financial to report earnings of $3.26 per share for 2022, up just 1.3% year over year. For 2023, I expect earnings to rise just 0.6% to $3.28 per share. The table below shows the estimates from my income statement.

fiscal year 2018 fiscal year 2019 fiscal year 20 fiscal year 21 FY22E FY23E
Statement of income
Net Interest Income 181 176 181 195 238 272
Provision for loan losses 4 30 Four. Five (24) 5 fifteen
Non-financial income 25 28 43 40 35 33
interest-free spending 118 126 119 124 130 154
Net Income – Sh. 58 33 42 98 99 100
EPS – Diluted ($) 1.81 1.06 1.39 3.22 3.26 3.28
Source: SEC filings, author’s estimates (in millions of dollars, unless otherwise specified)

Actual earnings may differ materially from estimates due to risks and uncertainties related to inflation and, consequently, the timing and magnitude of interest rate increases. In addition, a stronger or longer than anticipated recession may increase provisions for expected credit losses beyond my estimates.

HAFC is currently trading at a significant discount to the target price

Hanmi Financial offers a dividend yield of 3.9% at the current quarterly dividend rate of $0.25 per share. Earnings and dividend estimates suggest a 30% payout rate for 2023, which is below the five-year average of 49%. However, I don’t expect an increase in the dividend level as I expect earnings to be flat.

I am using the historical price-to-book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Hanmi Financial. The stock has traded at an average P/TB ratio of 1.08 in the past, as shown below.

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fiscal year 2018 fiscal year 2019 fiscal year 20 fiscal year 21 Average
T. Book Value per Share ($) 16.9 17.9 18.7 20.7
Average Market Price ($) 27.1 20.7 11.2 19.4
Historical P/TB 1.61x 1.16x 0.60x 0.94x 1.08x
Source: Company Financials, Yahoo Finance, author’s estimates

Multiplying the average P/TB multiple with the projected tangible book value per share of $20.6 yields a target price of $22.1 by the end of 2023. This target price implies a 13.7% drop from the target price. closing on November 3. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 0.88x 0.98x 1.08x 1.18x 1.28x
TBVPS – Dec 2023 ($) 20.6 20.6 20.6 20.6 20.6
target price 18.0 20.1 22.1 24.2 26.3
Market price 25.7 25.7 25.7 25.7 25.7
up/(down) (29.8)% (21.7)% (13.7)% (5.7)% 23%
Source: Author’s estimates

The stock has traded at an average P/E of around 12.2x in the past, as shown below.

fiscal year 2018 fiscal year 2019 fiscal year 20 fiscal year 21 Average
Earning per share ($) 1.81 1.06 1.39 3.22
Average Market Price ($) 27.1 20.7 11.2 19.4
historical P/L 15.0x 19.5x 8.1x 6.0x 12.2x
Source: Company Financials, Yahoo Finance, author’s estimates

Multiplying the average P/E multiple with forecast earnings per share of $3.28 gives a target price of $39.9 for the end of 2023. This target price implies a 55.5% advantage over the closing price of November 3. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 10.2x 11.2x 12.2x 13.2x 14.2x
EPS 2023 ($) 3.28 3.28 3.28 3.28 3.28
Target price ($) 33.3 36.6 39.9 43.2 46.5
Market Price ($) 25.7 25.7 25.7 25.7 25.7
up/(down) 29.9% 42.7% 55.5% 68.3% 81.1%
Source: Author’s estimates

By equally weighting the target prices of the two valuation methods, a $31.0 price target, which implies a rise of 20.9% compared to the current market price. If the term dividend yield is added, a total expected return of 24.6% is obtained. Therefore, I am adopting a buy rating on Hanmi Financial Corporation.

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