If you're going to invest in bank stocks, you should always go for quality. And few banks measure up on this score as well as Bank of Hawaii (NYSE:BOH).
In this episode of Industry Focus: Financials, The Motley Fool's Gaby Lapera and John Maxfield talk about why Bank of Hawaii is one of Gaby's favorite stocks right now.
A full transcript follows the video.
This podcast was recorded on Aug. 22, 2016.
Gaby Lapera: I have to tell you that I am a risk-averse person. I don't think that you would guess that I'm 27 based on my behavior -- maybe more like 67. This first bank really appeals to that side of me, and it's Bank of Hawaii.
John Maxfield: Bank of Hawaii is a great one. It's interesting, Gaby, because everything that you say is extremely valid. If you're going to go out and buy a stock, why would you want to buy one when everything is going great for either that industry or for that particular company at that particular time? That's when the shares trade for really high valuations. Right now, stocks are really expensive. So, if you're going to go out and really look for good purchases as an investor, you've got to look in those corners of the market where there's something else that's going on that's depressing valuations.
Banks stocks are a perfect example, but here's the irony, Gaby: You've picked one of ... Over the past decade, it's one of the best-run banks.
Lapera: I know what you're going to say.
Maxfield: It's such a good bank, and it's one of those that you can't go wrong with that holding, so it's a great core bank stock to add to your portfolio, but you've certainly picked one that isn't cheap right now.
Lapera: Well, it's slightly cheaper than it has been.
Maxfield: Yeah, that's true. Here's what's interesting, when I think of Bank of Hawaii ... I don't know if you're the same way, Gaby, but when I think about companies, I always try to think about one tangible thing about that company that really sticks in my head and then I can pull that up and then work backwards from there when I'm thinking about a company. The one thing about Bank of Hawaii that I think of is the fact that it is such a good bank. This is a regional bank that's based in Hawaii.
Lapera: As the name implies.
Maxfield: Exactly, but it is such a good bank that when Citigroup (NYSE:C) -- which went into the crisis as the largest bank in the country -- got into trouble and had to change out the chairman of its board, do you know who they picked? They picked the former CEO of Bank of Hawaii.
Lapera: I actually didn't know that!
Maxfield: Investors in the bank industry, we know about Bank of Hawaii because it's an incredibly well-run bank, but this isn't just like a small regional bank that's just on that radar. The top banking people in the country know how well run that thing is.
Lapera: Just to give a little bit of context to that. Bank of Hawaii, as far as banks go, is actually not that big. It's only got a market cap of $3 billion. (I love that. I can say stuff like, "It's only got a market cap of $3 billion." It's kind of like geological age, like the numbers just stop fazing you at certain points.) Anyway, market cap of $3 billion, and it has a really impressive performance in terms of nonperforming loans. Over the years, its ratio has hovered around 0.2% of total loans, and that's only 0.1% of total assets, which is pretty incredible. And their coverage ratio is over 170%. Just to back up, a coverage ratio is basically how much the bank has saved up just in case loans go bad. Ratios above 100 mean that they can definitely cover any loans that go bad.
Maxfield: Here's the other thing. That credit risk element is such a critical element. Talking about bad loans and a 0.2% ... I don't know if that's their net charge-off ratio or if that's how much they're putting away in provisions. That is so critical because when you think about banks, you really want two things -- three things if you throw in valuation.
The first is that you want a bank that's profitable enough that it is more than earning its cost of capital. That means that it's been creating value for shareholders. The Bank of Hawaii has consistently done that over the years. The other thing -- and I think this is something investors have a tendency to overlook when you think about bank stocks -- is that it's not just about generating a high profitability in good times. What's equally as important -- in fact, one could argue it's more important -- it's about consistency of earnings over a long period of time. Because you don't want to give all of those earnings back every time the cycle turns around.