First Hawaiian Bank's Q2 2025 Earnings: A Case for Reevaluation in a Discounted Regional Bank

First Hawaiian Bank (FHB) has long been a subject of debate among investors, oscillating between being labeled a “value gem” and a “geographic risk.” Its Q2 2025 earnings report, however, may tip the scales in favor of the former. With a 23% sequential jump in net income to $73.2 million and a diluted EPS of $0.58 (up 23.4% from Q1), the bank has demonstrated resilience in a high-rate environment. Yet, despite these robust results, FHB remains a “Strong Sell” in the eyes of many analysts. This article examines whether the company's strong earnings and operational improvements justify a reevaluation of its undervaluation and negative ratings.

Operational Excellence and Strategic Strengths

FHB's Q2 2025 performance was driven by a broad-based improvement in net interest income (up $3.1 million to $163.6 million) and a 6.9% increase in non-interest income to $54 million. The net interest margin (NIM) expanded to 3.11%, a 3-basis-point improvement, while the efficiency ratio fell to 57.2%, a 1.5-point beat. These metrics highlight the bank's disciplined cost management and ability to leverage its low-cost deposit base.

The bank's capital position is equally compelling. With a CET1 ratio of 13.03% and a total capital ratio of 14.28%, FHB exceeds regulatory requirements. Its share repurchase program, which saw 1.04 million shares retired at $23.99, further underscores management's confidence in its valuation. These actions align with a long-term strategy of returning capital to shareholders while maintaining a fortress balance sheet.

Valuation Discrepancy and Analyst Skepticism

Despite these strengths, FHB trades at a significant discount to its regional peers. As of July 25, 2025, its P/E ratio stands at 13.70, below the 13.6x-15.6x average of its peers, including East West Bancorp (12.12), Zions Bancorporation (9.98), and Bank of Hawaii (18.28). The price-to-book (P/B) ratio of 1.11 is even more strikingly low compared to an industry average of 13.6x. This discount reflects persistent concerns over Hawaii's tourism-dependent economy, which accounts for ~20% of the state's GDP and is sensitive to global travel trends.

Analysts from Barclays and Bank of America have maintained “Underweight” ratings, citing the geographic concentration risk. However, FHB's Q2 results—including a 57% reduction in the provision for credit losses and a 12.9% annual increase in tangible book value per share—suggest that the bank's credit quality and capital discipline may mitigate these risks. The effective tax rate of 16.9%, driven by California's revised tax code, also provides a tailwind to earnings.

Historically, FHB has demonstrated a 66.7% hit rate on earnings days (positive returns within three days of the report) since 2022, with an average return of 1.2% post-earnings. Notably, the stock has experienced a maximum drawdown of 8.9% during this period, typically following underperforming quarters or broader market volatility. These results suggest that while earnings-driven volatility persists, the market has historically rewarded FHB's operational outperformance with positive price action, particularly when results beat estimates. For example, the bank's 18.68% EPS beat in Q2 2025 aligns with its historical pattern of rewarding strong execution.

Reconciling the Discrepancy: A Case for Reevaluation

The key question is whether FHB's operational strengths and financial discipline warrant a reevaluation of its current valuation. Three factors argue in favor:
1. Earnings Momentum: FHB's 18.68% EPS beat and 6.3% revenue growth (up from 4.1% YoY) outperform both its peers and Wall Street's conservative expectations.
2. Capital Allocation: The bank's share repurchases and stable dividend yield of 4.09% position it as a compelling income play in a high-rate environment.
3. Resilient Balance Sheet: With non-performing assets at 23 basis points and a well-capitalized position, FHB is better prepared to weather economic downturns than many of its peers.

However, the bearish sentiment persists due to Hawaii's economic exposure. A recession-induced slump in tourism could strain the bank's C&I portfolio, particularly dealer floor plan loans. Yet, FHB's proactive diversification into non-interest income (up 6.9% to $54 million) and its 1.03% cost of deposits (lower than the 139 basis points industry average) provide a buffer.

Investment Implications

For investors willing to tolerate cyclical risks, FHB presents an attractive opportunity. Its forward P/E of 13.70 and projected tangible book value per share of $14.72 suggest a 9.1% ROE and 5.1% loan growth trajectory. Analysts' average 12-month price target of $24.83 (a 4.6% upside from current levels) appears conservative, especially given the bank's history of beating estimates.

That said, caution is warranted. Investors should monitor Q3 results for signs of sustained credit quality and loan growth. A continued decline in retail and commercial deposits, or a spike in non-performing assets, could reignite bearish sentiment.

Conclusion

First Hawaiian Bank's Q2 2025 performance challenges the narrative of a “geographic risk.” Its operational efficiency, capital discipline, and strategic initiatives in digital banking have positioned it as a resilient player in a fragmented regional banking sector. While the “underweight” ratings reflect valid concerns, the valuation discrepancy between FHB and its peers appears unjustified. For long-term investors, this may represent a compelling entry point—provided they are prepared to navigate the unique risks of Hawaii's economy.