Bank of Hawaii: The High-Yield Preferred Shares Offer The Best Value (Rating Downgrade)

Bank of Hawaii posted robust Q1 results, with net interest income up 20% and loan loss provisions down more than 40%, indicating improved core banking fundamentals. The preferred Series A shares, BOH.PR.A, are highlighted as attractive at a nearly 6.8% yield due to a market discount. The common stock is downgraded to hold as valuation remains above 2x book and 3.6x tangible book value.

Analysis

The cleaner takeaway is not just that earnings improved, but that BOH’s balance sheet is finally generating enough spread income to support both the common and the preferred without relying on heroic credit assumptions. In a regional bank with a high-quality deposit base, a stronger NII run-rate tends to be more durable than a one-quarter provision drop, so the market should be treating this as a normalization story rather than a one-off beat. That said, the common’s rerating is harder to justify once it trades well above tangible book; the easy upside has likely migrated to capital structure layers below it.

BOH.PR.A looks relatively compelling because the preferred yield is being driven more by technical discounting than by any obvious fundamental stress. In a stable-rate or modestly lower-rate environment, preferreds of this type can grind tighter as income buyers step in, while the common’s multiple expansion is capped by the bank’s already-rich valuation. The second-order effect is that income capital may rotate from the common into the preferred, limiting upside in BOH equity even if fundamentals remain solid.

The main risk is rate sensitivity: if funding costs reaccelerate or deposit betas worsen over the next 1-2 quarters, the NII tailwind can flatten quickly and the current optimism around earnings power will compress. Credit also matters on a lag; provision relief today can reverse with a 6-9 month delay if commercial real estate or consumer delinquencies deteriorate. In that scenario, the preferred likely outperforms the common on a total-return basis because it is being bought for carry, not growth, and its downside is more anchored unless there is a true solvency issue.

Key Decisions for Investors

• Stay underweight BOH common or use it as a trim candidate on strength; above 2x book / 3.6x tangible book leaves limited multiple expansion and asymmetric downside if the NII cycle cools over the next 1-2 quarters.
• Accumulate BOH.PR.A on pullbacks for carry; target a 6.5%+ effective yield with a 6-12 month horizon, as the market discount should narrow if credit remains stable and rates drift lower.
• Relative-value trade: long BOH.PR.A / short BOH common in size-adjusted exposure, betting that income capital prefers the preferred’s cash yield while the common’s valuation compresses if growth normalizes.
• Set a risk trigger around any uptick in deposit costs or reserve builds in the next earnings cycle; if funding pressure reappears, reduce preferred exposure only if spread widening suggests a broader bank-sector repricing.
• For more aggressive portfolios, consider selling upside calls against BOH common into strength to monetize the rich valuation while retaining limited participation if the bank continues to outperform.