Why DA Davidson Is Downgrading Bank Of Hawaii

In a report published Tuesday, DA Davidson analysts downgraded the rating on

from Buy to Neutral, while reducing the price target from $95 to $65. The company reported its 1Q15 EPS at $0.97, higher than the estimate and the Street consensus. The earnings beat was driven by higher-than-normal securities gains, which more than offset a significant rise in operating costs. Bank of Hawaii reported spread income of $96.7 million ahead of the estimate, on account of balance sheet growth rather than margins. Net loan growth was 16.3 percent annualized, double the analysts' expectation. Non-interest income rose $6.5 million from the prior quarter. Operating costs grew 7.0 percent linked quarter and was $5 million more than the analysts' expectation. Credit quality once again improved. The EPS estimates for 2015 and 2016 have been reduced from $3.95 to $3.70 and from $4.35 to $4.10, respectively. The downward revision reflects "lower margins, reduced fee income, and higher operating expenses." "Despite the earnings reduction, we are encouraged by the continued strong growth in loans. The large securities gain and spike in operating costs added substantial volatility to the quarter, but we expect these line items to moderate going forward," the analysts said. "With solid 1% ROA and 15% ROE profitability metrics expected, a sound economic picture in the bank's operating footprint and meaningful balance sheet growth, Bank of Hawaii should maintain a premium valuation versus peer banks," the report explained.