Why Investors Need to Have a Reality Check with the Options Volume for Bank of Hawaii (BOH)

Reminiscent of a bygone era when combustion cars were just starting to make their impact in the consumer economy, many investors may have decided to hold onto regional financial firms like Bank of Hawaii (BOH). After all, bank runs and related failures occur in troubled nations or are seemingly the exclusive domain of history books.

Of course, the reality is that bank failures in the U.S. have materialized in modern times, most prominently in the run up to and following the Great Recession. However, having been blessed with relative economic prosperity, an immediacy bias may have kicked in, lulling market participants in keeping the faith with BOH stock and its ilk.

Unfortunately, recent government action – along with unusual volume dynamics in the derivatives market – suggests that investors must have sober discussions about their next moves.

Early Warning Signs Against BOH Stock

Naturally, the bank runs that impacted two major regional financial institutions in March presented a wake-up call to the entire industry. But for Bank of Hawaii specifically, the bulls continued to hold the line despite clear warning signs.

As Zacks Equity Research reported in late April, the regional bank failed to impress onlookers with its results for the first quarter of 2023. For profitability, Bank of Hawaii posted earnings per share of $1.14, missing analysts’ consensus EPS target of $1.23. Further, the bottom line declined 13.6% against the year-ago quarter’s result.

Additionally, net income came out to $46.8 million, down 14.6% on a year-over-year basis. It also missed the Street’s target for $47.8 million. On the top line, total revenue hit $176.7 million, which actually increased 4.7% YOY. Unfortunately, this tally too missed analysts’ consensus expectations for $177.7 million.

To be fair, “[t]he bank’s net interest income was $136 million, up 8.5% primarily due to a rise in earning asset yields and loan growth, partially offset by higher funding costs.” Still, Zacks’ estimate for the metric was $142.2 million.

Following the earnings report, BOH stock rumbled around a bit before First Republic Bank (FRCB) failed. Since then, shares have been decidedly on a downward trend. To leave little room for alternative interpretations, BOH also became an unfortunate highlight in Barchart’s screener for unusual stock options volume.

Following the close of the May 12 session, total volume reached 12,298 contracts against an open interest reading of 16,033. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 607.19%. Drilling down, put volume hit 10,134 contracts while call volume only mustered 2,164. This pairing yielded a put/call ratio of 4.68, on paper indicating deeply bearish sentiment.

Though anything can happen, the darkening clouds appear ominous for BOH stock.

No Real Reason to Hold the Risk

Amid the bank failures this year – three and counting – much of the news cycle appears to center on the federal government’s protection of impacted depositors. Under normal protocol, the standard deposit insurance coverage limit is $250,000 per depositor, per each bank insured by the Federal Deposit Insurance Corporation (FDIC).

Therefore, if a bank fails, so long as you didn’t exceed the 250K limit (or by not that much), you could sleep easy. However, if you were a wealthy individual or had a high-value business with an account tied to one of the troubled banks, you obviously incurred a much different experience.

To be sure, the U.S. government got ahead of the problem quickly, injecting confidence into the broader financial system by ensuring that depositors’ funds in the failed institutions would be protected. However, that was only part one of the crisis. The other part – the banking stakeholders’ end – was left to fend for itself.

Indeed, during the initial report of First Republic’s failure, the AP noted that the bank’s shareholders are likely to be wiped out. It’s no wonder, then, that BOH stock and shares of other banking enterprises have been so volatile recently.

Basically, the government bluntly declared that shareholders of failed banks will end up holding the bag. Under that circumstance, why would investors bother holding the risk?

Of course, speculators will speculate. But for anyone that holds a significant amount of BOH stock (or similar investments) in their portfolios, the risk-reward balance seems highly skewed to the downside.

Be Smart About the Reality

Moving forward, the broader fundamentals – the bank failures, lack of protection for shareholders and unusually bearish dynamics in the options market – should spark lengthy introspection. No, it’s not a time to panic. However, we’ve seen that even seemingly robust financial firms can collapse in the blink of an eye. You have to decide if that kind of extreme risk is worth your troubles.

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