DBRS Places Bank of Hawaii Corporation’s Long-Term Issuer Rating of A (low) Under Review-Positive

DBRS, Inc. (DBRS) placed the Long-Term Issuer Ratings of Bank of Hawaii Corporation (BOH or the Company) and its primary banking subsidiary, Bank of Hawaii (the Bank), Under Review with Positive Implications. Additionally, DBRS has placed the Bank’s Short-Term Issuer Rating of R-1 (low) Under Review with Positive Implications, while confirming the Company’s Short-Term Issuer Rating of R-1 (low) and maintaining the Stable trend.

Previously a rating constraint, DBRS has gained additional comfort with the Company’s underwriting, as well as with Hawaiian real estate exposure in general, given its still growing strong global demand that in DBRS’s view limits downside risk in times of stress, especially considering how well BOH performed through the last recession. Strong asset quality has contributed to BOH’s consistent above peer performance, including generating an ROA above 1% and a double-digit ROE for 15 consecutive years, as well as in each quarter during 2017. The review will focus on whether the Company can sustain its track record of stable, predictable and above average profitability, while maintaining strong balance sheet fundamentals going forward. DBRS expects to conclude the review within 90 days.

BOH’s deeply entrenched presence within the Hawaiian markets underpins its strong banking franchise. Specifically, the Company operates the most branches in Hawaii, has the second largest deposit market share at 32% and is also the top mortgage provider in the state, in both the number of loans, as well as total dollar amount. Furthermore, BOH 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 3Q17, BOH reported net income of $45.9 million, representing an ROA of 1.07%. Highlights from the quarter included strong loan and deposit growth (both up about 2% sequentially), modest improvement in net interest income and well-contained expenses. Meanwhile, fee income, which typically represents around 30% to 35% of revenue, declined modestly from the prior quarter due to lower mortgage banking income, seasonal tax services fees and annuity insurance income.

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 times of stress. Importantly, asset quality metrics have remained pristine, with very low levels of nonperforming assets and net charge-offs (3Q17 NCO ratio of 0.15%).

BOH’s funding and liquidity profile remains strong, supported by a high level of core deposits that easily funds the loan portfolio. Meanwhile, the Company’s capital ratios remain sound (CET1 of 13.3% at the end of 3Q17), despite ongoing capital management activities.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $17.3 billion in assets at September 30, 2017.

The Grid Summary Scores for BOH are as follows: Franchise Strength – Strong/Good; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Good.

RATING DRIVERS
The ratings could be upgraded if BOH continues to generate similar financial results and balance sheet trends. 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 methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), 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, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 5 January 2006
Most Recent Rating Update: 2 August 2017

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 in connection with this rating action.