DBRS Confirms Bank of Hawaii Corporation at A (low); Trend Stable

DBRS, Inc. (DBRS) has today confirmed all ratings of Bank of Hawaii Corporation (BOH or the Company) and its related bank subsidiary, including the Company’s Issuer & Senior Debt rating at A (low). The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings confirmation reflects BOH’s deeply rooted, defensible banking franchise in Hawaii that has enabled the Company to deliver consistently strong financial results even during times of stress. BOH’s strong balance sheet is supported by pristine asset quality, solid capital, and ample stable, low cost deposit funding. The ratings also consider the Company’s dependence on the Hawaiian economy, loans and securities portfolios that are heavily concentrated in real estate, and challenging operating environment that includes limited revenue growth and higher regulatory and compliance costs.

DBRS views BOH as being in the top quartile of its rating category. If the Company is able to successfully grow its fee-based businesses to further diversify its revenue generation while maintaining its strong balance sheet, the ratings could be upgraded. Conversely, unexpected losses large enough to invade capital or a higher appetite for risk could result in ratings pressure.

BOH continues to report consistently solid results. Indeed, for the first nine months of 2014, the Company reported net income of $121.9 million, an increase of 9% compared to the same time period in 2013 reflecting higher net interest income, lower expenses, and a negative provision for credit losses that more than offset lower noninterest income primarily from lower mortgage banking revenues. Moreover, DBRS expects continued solid results from BOH in 2015.

Hawaii is benefiting from higher visitor spending within in its tourism industry (2014 is also on track to break 2013’s record of visitor levels), a strong real estate market highlighted by very little inventory, relatively low unemployment, and a growing construction industry. While the Company’s loan portfolio is heavily dependent on real estate and is geographically concentrated in Hawaii (89% of the loan portfolio is located in Hawaii), real estate values have been strong and were quite resilient during the most recent downturn. The military is also important to Hawaii’s economy and is home to the Pacific Command. Given its strategic importance geopolitically, Hawaii is unlikely to see any material cuts to military spending.

Credit quality remains very strong and has been improving. Specifically, loan recoveries have virtually offset charge-offs, nonperforming assets continue to decline, and the specific reserve was reduced for one commercial client resulting in a negative provision for credit losses of $4.9 million for 9M14. Regardless, the Company’s allowance for loan and lease losses remains strong at 1.67% of total loans and leases outstanding. DBRS expects a further reduction in the ratio in 2015 reflecting the lower credit risk profile of BOH being partially offset by continued loan growth.

Strong deposit funding helps underpin the rating. Indeed, total deposits have grown 4% this year to $12.4 billion and easily funds the loan and lease portfolio. Moreover, DBRS views the stable, low cost deposit base as defensible reflecting the Company’s strong brand and convenient footprint. Overall, BOH’s 3Q14 cost of funds was a low 29 basis points.

Through 3Q14, the Company repurchased $46.9 million of common stock and paid dividends totaling $59.9 million. Combined, BOH returned approximately 88% of net income to shareholders and this high total payout ratio is expected to continue. Even with a high total payout to shareholders, the Company’s capital remains sound with a tangible common equity ratio of 7.09% at September 30, 2014. On a risk-adjusted basis, this metric would improve to a very high 15.23%.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $14.5 billion in assets at September 30, 2014.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: William Schwartz
Initial Rating Date: 5 January 2006
Most Recent Rating Update: 22 November 2013

For additional information on this rating, please refer to the linking document under Related Research.