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, particularly within the State of Hawaii, as well as its solid earnings generation capacity and strong balance sheet fundamentals. 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.

BOH’s strong banking franchise reflects its deeply embedded presence within the Hawaiian markets. Indeed, BOH operates the most branches in Hawaii and has the second largest deposit market share at 32%. 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 it serves. 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.

DBRS considers BOH’s earnings power as solid, reflecting a high level of low cost deposits along with a lower risk profile that has contributed to low credit costs. Notably, the Company has generated sound through-the-cycle financial results, including favorable profitability during the financial crisis. For 9M16, BOH reported net income of $138 million, an increase of 17% compared to the same period in 2015, led by strong, broad-based loan growth, reflecting the strength of the Hawaiian economy. Specifically, total loans increased 10% (to $8.7 billion) from year-end, driving an improvement in net interest income. Meanwhile, fee income, which typically represents around 30-35% of revenue, also reflected solid improvement primarily due to stronger mortgage banking results, which benefited from higher loan production, as well as sales of conforming loans. Expenses remain well-contained, with an efficiency ratio of 57% in 9M16, while the provision for credit for credit losses was just $1.5 million, up from 0 in 9M15, due to loan growth.

BOH’s risk profile remains strong, despite its geographic concentration in Hawaii whose economic vitality is dependent on the tourism and defense industries. In addition, 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 continue to show resiliency even during the most recent downturn. Importantly, credit quality metrics have remained very strong during 9M16, as NPAs represented just 0.21% of loans and foreclosed real estate, while NCO’s were almost non-existent.

BOH’s other balance sheet fundamentals, including its strong funding and liquidity, as well as solid capitalization, provide key support to the ratings. Specifically, the Company maintains a high level of core deposits that easily funds the loan portfolio (core deposits represented 137% of net loans and leases as of 3Q16). Meanwhile, BOH’s capital base is comprised entirely of common equity and its TCE ratio was a sound 7.1% at September 30, 2016.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $16 billion in assets at September 30, 2016.

RATING DRIVERS
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.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under 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.

Lead Analyst: Michael McTamney
Rating Committee Chair: William Schwartz
Initial Rating Date: 5 January 2006
Most Recent Rating Update: 21 December 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.