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 strong and defensible banking franchise, supported by a significant deposit platform and strong brand name within the State of Hawaii. The strong franchise underpins BOH’s solid earnings generation capacity and strong balance sheet fundamentals, including sound asset quality, strong liquidity and funding profiles, and a solid capital position. DBRS notes that the ratings also take into consideration the Company’s high level of real estate exposure, as well as its dependence on the Hawaiian economy.

The Stable trend reflects DBRS’s view that the Company’s sound operating fundamentals are sustainable. Overall, DBRS’s considers BOH to be within the top quartile of its rating group. DBRS notes that sustained improved core earnings could result in positive rating actions. Conversely, ratings could come under pressure if BOH reflects a sustained level of credit deterioration, or if its risk appetite materially changes.

BOH’s strong banking franchise reflects its deeply embedded presence within the Hawaiian markets. Indeed, BOH operates the most branches (including in-store branches) in Hawaii and has the second largest deposit market share at 32.4%. The Company is also the top mortgage provider in Hawaii in both the number of loans, as well as total dollar amount. Importantly, the Company has a very strong brand in Hawaii, underpinned by strong market positions, convenient footprint, and high involvement in the communities they serve. Moreover, the Company continues to benefit from favorable market conditions in Hawaii, including low unemployment, stable tourism, a solid construction industry, and a strong real estate market.

Earnings generation remains solid despite some noise. For 9M15, BOH reported net income of $117.9 million, a decrease of 3.3% compared to 9M14, reflecting higher non-interest expense and the non-recurrence of a 2014 negative provision for loan loss reserves, both of which more than offset higher revenues. During 9M15, spread income increased by 3.3%, led by broad-based average loan growth. Meanwhile, excluding non-core items, such as securities gains and a loss associated with its pending sale of aircraft leases, fee income increased 3.1% for the nine month period, year-over-year (YoY), and represented approximately 31% of total revenues for 9M15. Finally, the Company’s expense base remains well managed. Excluding estimated impairment of residual value of six aircraft on which leases have matured, separation expenses and other non-core items, expenses for 9M15 increased 2.4%, YoY, mostly reflecting higher levels of salaries and benefits.

BOH’s risk profile remains strong, despite its geographic concentration in Hawaii whose economic vitality is dependent on the tourism and defense industries. While the Company’s loan portfolio is heavily dependent on real estate and is geographically concentrated within the small chain of islands that make up Hawaii, real estate values have been strong and showed resiliency even during the most recent downturn. Reflective of its strong credit quality, net charge-offs and non-performing assets (NPAs) were improved and remain very low. Specifically, NPAs represented a low 0.38% of loans and foreclosed real estate, down from 0.44% at December 31, 2014, and 0.50% at September 30, 2014. Meanwhile, charge-offs remain very low and represented 0.10% of average loans for 3Q15 and 0.09% for 9M15.

BOH’s funding and liquidity profiles remain strong and are a key consideration for the ratings. Indeed, core deposits represent a very high 147.8% of net loans and leases at September 30, 2015 (DBRS calculated). Finally, deposit pricing competition remains relatively benign in Hawaii, which helps keep funding costs low, and benefits the net interest margin.

DBRS notes that for 9M15, the Company repurchased $38.9 million of common stock and paid dividends totaling $58.9 million. Combined, BOH returned approximately 83% of net income to shareholders. Despite the relatively high payout, DBRS views BOH’s capital as sound with a tangible common equity ratio of 7.05% and Common Equity Tier 1 ratio of 14.11%, at September 30, 2015.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $15.2 billion in assets at September 30, 2015.

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 (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 2015), and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). 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: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: 5 January 2006
Most Recent Rating Update: 22 December 2014

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