Hanmi Financial: Earnings Likely To Stay Flattish (NASDAQ:HAFC)

Earnings of Hanmi Financial Corporation (NASDAQ:HAFC) will likely be flattish this year as the growth in operating and provisioning expenses will counter the growth in loan balances and the margin. Overall, I am expecting Hanmi Financial to report earnings of $3.29 per share for 2023, down by just 1% year-over-year. Compared to my last report on the company, I haven’t changed my earnings estimate much for this year. The December 2023 target price suggests a high upside from the current market price. Therefore, I’m maintaining a buy rating on Hanmi Financial Corporation.

Further Margin Expansion is Likely, Albeit at a Lower Rate

The impressive margin expansion witnessed in the second and third quarters subsided in the fourth quarter of 2022. The margin grew by only a basis point during the quarter, as opposed to a 45 basis points increase in the second quarter and 11 basis points growth in the third quarter of the year. The slowdown was partly attributable to changes in Hanmi’s deposit book. The company’s deposit mix significantly deteriorated during the last quarter as depositors chased yields and shifted funds towards higher-rate time deposits. The full-quarter impact of this mix shift will be experienced during the first quarter of 2023.

The management mentioned in the conference call that the cost of interest-bearing deposits was already up by 70 basis points in January.

Fortunately, the asset side is well positioned. Around a quarter of the loan portfolio reprices within just three months, as mentioned in the earnings presentation. Additionally, around 4% of loans will mature and reprice from months 4 to 12. Due to this rate sensitivity, the margin will continue to expand in 2023. Overall, I’m expecting the margin to grow by eight basis points this year.

Loan Growth Likely to Return to the Mid-Single-Digit Range

Hanmi Financial Corporation’s loan growth continued to remain above the historical average in the fourth quarter of the year. The portfolio grew by 2.9% in the quarter, taking full-year loan growth to 16%. The management appeared confident about loan growth prospects for the Corporate Korea portfolio in the conference call. However, the management expects a significant slowdown in the residential loan portfolio because of high mortgage rates.

In my opinion, total loan growth will most probably return to the mid-single-digit range this year. The high interest-rate environment will naturally put the brakes on the growth momentum. However, low unemployment rates indicate that the economy still has plenty of steam to run. Hanmi Financial Corporation’s loan portfolio is quite well diversified geographically, with exposure to borrowers in California, Texas, Illinois, Virginia, New Jersey, New York, Colorado, Washington, and Georgia. Therefore, the national average is an appropriate indicator of demand for Hanmi Financial’s products. As shown below, the unemployment rate continues to remain near record lows.

Considering these factors, I’m expecting the portfolio to grow by 6% in 2023. Further, I’m expecting other balance sheet items to grow somewhat in line with loans. The following table shows my balance sheet estimates.

Financial Position	FY18	FY19	FY20	FY21	FY22	FY23E
Net Loans	4,569	4,549	4,790	5,079	5,896	6,257
Growth of Net Loans	6.9%	(0.4)%	5.3%	6.0%	16.1%	6.1%
Other Earning Assets	601	657	762	924	862	888
Deposits	4,747	4,699	5,275	5,786	6,168	6,547
Borrowings and Sub-Debt	173	208	269	353	479	494
Common Equity	553	563	577	643	638	707
Book Value Per Share ($)	17.2	18.3	19.1	21.1	21.0	23.3
Tangible BVPS ($)	16.9	17.9	18.7	20.7	20.6	22.9
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

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Expecting Earnings to Remain Flattish in 2023

The anticipated mid-single-digit loan growth and slight margin expansion will support earnings this year. However, inflation-driven growth of operating expenses will restrict the growth of the bottom line. Further, the provisioning for expected loan losses will likely rise to a normal level due to the economic headwinds. However, I’m not expecting it to go beyond a normal level. Despite the rising interest rates and high-inflation environment, the loan portfolio’s credit quality improved during the fourth quarter. Criticized loans dropped to 2.1% by the end of December 2022 from 2.94% at the end of September 2022 and 3.03% at the end of December 2021, as mentioned in the earnings presentation. Overall, I’m expecting provisioning to make up 0.24% of total loans in 2023, which is the same as the average for the last five years.

Considering these factors, I’m expecting the earnings to dip by 1% year-over-year in 2023 to $3.29 per share. The following table shows my income statement estimates.

Income Statement	FY18	FY19	FY20	FY21	FY22	FY23E
Net interest income	181	176	181	195	238	273
Provision for loan losses	4	30	45	(24)	1	15
Non-interest income	25	28	43	40	34	29
Non-interest expense	118	126	119	124	130	149
Net income – Common Sh.	58	33	42	98	101	100
EPS – Diluted ($)	1.81	1.06	1.39	3.22	3.32	3.29
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

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In my last report on Hanmi Financial, I estimated earnings of $3.28 per share for 2023. I’ve tweaked almost all income statement line items following the fourth quarter’s results, but my changes are not large enough to have a significant impact on the earnings estimate for this year.

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

Attractive Price Upside, High Dividend Yield

Hanmi Financial is offering a dividend yield of 4.4% at the current quarterly dividend rate of $0.25 per share. The earnings and dividend estimates suggest a payout ratio of 30% for 2023, which is in line with the five-year average of 45%. Therefore, there is room for a dividend hike. However, I’m not expecting a dividend increase in order to remain on the safe side.

I’m using the historical price-to-tangible 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.

	FY18	FY19	FY20	FY21	FY22	Average
T. Book Value per Share ($)	16.9	17.9	18.7	20.7	22.9
Average Market Price ($)	27.1	20.7	11.2	19.4	24.7
Historical P/TB	1.61x	1.16x	0.60x	0.94x	1.08x	1.08x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/TB multiple with the forecast tangible book value per share of $22.9 gives a target price of $24.7 for the end of 2023. This price target implies a 7.5% upside from the January 30 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	0.88x	0.98x	1.08x	1.18x	1.28x
TBVPS – Dec 2023 ($)	22.9	22.9	22.9	22.9	22.9
Target Price	20.1	22.4	24.7	26.9	29.2
Market Price	22.9	22.9	22.9	22.9	22.9
Upside/(Downside)	(12.5)%	(2.5)%	7.5%	17.5%	27.4%
Source: Author’s Estimates

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The stock has traded at an average P/E ratio of around 11.2x in the past, as shown below.

	FY18	FY19	FY20	FY21	FY22	Average
Earnings per Share ($)	1.81	1.06	1.39	3.22	3.32
Average Market Price ($)	27.1	20.7	11.2	19.4	24.7
Historical P/E	15.0x	19.5x	8.1x	6.0x	7.5x	11.2x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/E multiple with the forecast earnings per share of $3.29 gives a target price of $36.9 for the end of 2023. This price target implies a 60.9% upside from the January 30 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	9.2x	10.2x	11.2x	12.2x	13.2x
EPS 2023 ($)	3.29	3.29	3.29	3.29	3.29
Target Price ($)	30.3	33.6	36.9	40.2	43.5
Market Price ($)	22.9	22.9	22.9	22.9	22.9
Upside/(Downside)	32.2%	46.6%	60.9%	75.2%	89.6%
Source: Author’s Estimates

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Equally weighting the target prices from the two valuation methods gives a combined target price of $30.8, which implies a 34.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 38.3%. Hence, I’m maintaining a buy rating on Hanmi Financial Corporation.