Shares of Hancock Whitney Corporation (NASDAQ:HWC) have done okay since my last update in early March, outperforming regional bank peers with a circa 7% total return in that time. Back then, I rated HWC a "Buy," with that driven by a then-valuation of just 1.25x tangible book value per share ("TBVPS"). With the bank still clearing a mid-teens return on tangible common equity ("ROTCE"), and targeting a slightly better high-teens ROTCE by 2026, the stock theoretically offered investors an attractive 12-14% internal rate of return.

While Hancock's near-term earnings outlook has been subdued, the outlook is improving as funding cost pressure continues to ease. Additionally, Hancock's strong balance sheet has attracted the attention of analysts, pointing to the near-term resumption of stock buybacks. With the shares still trading for an undemanding valuation, HWC remains attractive ahead of Q2 earnings next month, when more color on capital returns might be forthcoming. I keep my "Buy" rating in place.

Headwinds Are Continuing To Ease

To quickly recap, Hancock Whitney's standout feature is its deposit franchise. Despite headwinds from migration to interest-bearing accounts, non-interest-bearing ("NIB") balances still totaled around $10.8 billion at the end of Q1, funding approximately 30% of the bank's asset base. This ultra-cheap source of funding supports relatively wide net interest margin ("NIM"), ultimately leading to healthy through-the-cycle ROTCE.

Like most regional banks, Hancock has seen NIM pressure from higher funding costs, driven by both deposit migration and from having to offer higher yields on savings accounts to stem outflows. In addition, higher interest rates have sapped demand for credit, making it harder to offset this headwind via loan growth.

These issues were showing tangible signs of easing when I last covered the bank post-4Q23 results, and this has continued into 2024. In Q1, NIB balances fell by 2% on a period-end basis from 4Q23, an improvement on the 5% sequential decline seen between 3Q23 and 4Q23. As a result, NIB balances as a share of total deposits are beginning to settle at around the 35-36% mark.

This improving trend has helped stabilize funding costs. While Hancock's cost of deposits did rise 7bps quarter-on-quarter in Q1 to 2.01%, the monthly trend is more positive, with the March figure (2%) down a little month-on-month and basically in-line with December (1.99%).

Positively, NIM actually expanded 5bps in Q1 to 3.32%, the first quarter since 4Q22 that NIM has increased. Management expects "modest expansion" in NIM this year, with NIM having seen bottomed in 4Q23. This implies that funding cost pressure has now largely run its course at the bank.

Flush With Capital

Between the start of 2021 and end of 2023, Hancock only paid out around 21% of its net income by way of cash dividends. While management did also conduct share repurchases in that time, most of the bank's profit was retained to fund growth.

Recent trends have largely disrupted this. Firstly, management prudently stepped back from share repurchases last year in light of the significant uncertainty facing the regional bank industry. Moreover, the higher interest rate environment has reduced demand for credit. Hancock's total loan book stood at around $23.8 billion last quarter, up just 2% year-on-year. Management has identified disciplined loan pricing as a headwind to growth, essentially implying that it is finding it tough to issue loans that meet its profitability hurdle.

With the bank remaining comfortably profitable in that time, the upshot of this has been the accumulation of significant levels of surplus capital on its balance sheet. Hancock's CET1 capital ratio clocked in at ~12.65% in Q1, up over 30bps sequentially and over 100bps year-on-year. Its CET1 is now running well above recent historical levels, landing around 200bps higher than the equivalent period in 2020.

This has led Citi (C) to predict a resumption of share repurchases in the near-term, which they see as a source of upside versus current consensus EPS. Note that Hancock still has authorization to repurchase around 5% of its shares outstanding, with this authorization expiring at the end of the year.

A resumption of buybacks seems highly likely for a number of reasons. Firstly, and as per above, certain headwinds to Hancock's P/L have now settled down, and this was a principal reason why buybacks were paused to begin with. Secondly, accumulation of surplus capital represents a slight headwind to management's ROTCE ambitions, with the goal being to deliver an 18% ROTCE by 2026. ROTCE was 14.96% in Q1, and distributing surplus capital will help increase this. Thirdly, buybacks conducted at the current valuation look attractive in their own right since, despite earning a mid-teens ROTCE, the stock currently trades for just under 1.35x TBVPS. Finally, management heavily hinted at resuming buybacks soon on the last earnings call:

And related to the buybacks, I think it's a pretty good option that we would probably resume buybacks at some level, at some point in the next quarter or so. So I don't think that's necessarily constrained or going to be delayed to the back half of the year. And some of those things could start to occur as early as this quarter.

Mike Achary, CFO Hancock Whitney, Q1 2024 Earnings Call.

Note also that management recently hiked the quarterly dividend by 33% (to $0.40 per share). As analysts expect around 9% EPS growth this year, this means Hancock's payout ratio has expanded, a further sign that management is attempting to distribute surplus capital to shareholders. As this still only equates to a dividend payout ratio of around 32% based on consensus 2024 EPS, Hancock still has ample space to conduct both share buybacks and fund future growth.

Valuation

At $45.68 at the time of writing, Hancock Whitney stock trades for 1.35x 1Q24 TBVPS ($34.12). On a mid-teens ROTCE, this implies a P/E of less than 10x, or an earnings yield exceeding 10%. Relative to its recent historical average, the current P/TBVPS represents a discount of approximately 15%.

Given this, multiple expansion continues to form a component of my "Buy" rating. Assuming a mid-cycle mid-teens ROTCE and commensurate ~1.5x TBVPS multiple, HWC stock would trade at a ~10x P/E. Applied to 2025 consensus EPS, this results in a one-year price target of $50.50 per share, mapping to roughly 11% share price appreciation. Inclusive of $1.60 per share in annualized dividends, this increases to a total return price of $52.10 per share, implying a circa 14% total return over the next 12 months. As such, I maintain my "Buy" rating on HWC stock.