DBRS Upgrades Bank of Hawaii Corporation’s Long-Term Issuer Rating to ‘A’; Trend Stable

DBRS, Inc. (DBRS) upgraded most of the ratings for Bank of Hawaii Corporation (BOH or the Company) and its primary banking subsidiary, Bank of Hawaii (the Bank), including the Company’s Long-Term Issuer Rating to ‘A’ from A (low). The trend on all ratings is now Stable. The Intrinsic Assessment (IA) for Bank of Hawaii was raised one notch, to A (high) from ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA. These actions remove the ratings from Under Review with Positive Implications where they were placed on December 21, 2017.

The ratings upgrade reflects DBRS’s expectation that BOH’s sustained track record of stable, predictable and above average profitability, while maintaining strong balance sheet fundamentals will continue going forward. DBRS notes that the Company has generated a ROA above 1% and a double-digit ROE for 16 consecutive years, including exceptional results during the financial crisis. During this time of outperformance, BOH’s ratings had previously remained unchanged. Further, DBRS has gained additional comfort with BOH’s underwriting, as well as with Hawaiian real estate exposure in general, given its strong and still growing global demand, that in DBRS’s view, limits downside risk in times of stress.

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. For 2017, BOH reported net income of $184.7 million, up 2% from 2016, led by strong, broad-based loan growth, reflecting the strength of the Hawaiian economy. Specifically, average total loans increased 12% (to $9.7 billion) from the end of 2016, driving an improvement in net interest income. Meanwhile, fee income, which typically represents around 30% to 35% of revenue, declined somewhat, reflecting lower mortgage banking income. Expenses remained well-contained, with an efficiency ratio of 56% in 2017, while the provision for credit losses was $16.9 million, up from $4.8 million in 2016, largely due to the strong 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 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 (2017 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 13.2% at year-end), despite ongoing capital management activities.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $17.1 billion in assets at December 31, 2017.

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

RATING DRIVERS
Given the recent rating action, DBRS views additional upward ratings migration over the intermediate term as unlikely. Conversely, negative ratings pressure could result from sustained deterioration in asset quality that would lead to weaker earnings.

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: 21 December 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.