DBRS Morningstar Confirms Bank of Hawaii Corporation’s Long-Term Issuer Rating at ‘A’; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Bank of Hawaii Corporation (BOH or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Bank of Hawaii (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (high), 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.

KEY RATING CONSIDERATIONS
The ratings confirmation and Stable trend reflect BOH’s strong banking franchise that is underpinned by a deeply entrenched presence within the Hawaiian markets. In addition, the Company has consistently generated strong financial results even during times of stress, while sustaining sound balance sheet fundamentals. DBRS Morningstar notes that the ratings also consider BOH’s high level of real estate exposure, as well as its dependence on the Hawaiian economy. Global fallout from Coronavirus Disease (COVID-19), including a slowing economy and sharply lower interest rates that will result in declining profitability levels are also factored into the ratings.

RATING DRIVERS
DBRS Morningstar views BOH as comfortably placed within its rating category. Over the longer term, positive ratings implications could arise if the Company can grow its fee-based businesses to further diversify its revenue generation. Conversely, a sustained level of credit deterioration, or if BOH’s risk appetite materially increases, could result in negative ratings pressure.

RATING RATIONALE
BOH benefits from having a strong brand within the Hawaiian Islands. In addition, the Company operates the most branches in Hawaii, has the second largest deposit market share at 33%, and is the top residential mortgage provider in the state, in both the number of loans and total dollar amount. During 2019, the Hawaiian economy and operating environment remained favorable, with low unemployment, strong tourism, a solid construction industry and a strong real estate market, although these trends will likely be negatively impacted in 2020 given the expected fallout from the coronavirus. Nevertheless, Hawaiian real estate values have been quite resilient during previous downturns and are supported by a limited supply. Additionally, the U.S. military has a major presence in Hawaii, and as a result, plays a significant role in Hawaii’s economy. Given its strategic importance geopolitically, Hawaii is unlikely to see any material cuts to military spending.

DBRS Morningstar views BOH’s earnings power as strong, having generated a return on assets (ROA) above 1% and a double-digit return on equity (ROE) for 17 consecutive years, including another strong performance in 2019. For the year, the Company reported $226 million of net income, representing a ROA of 1.29% and ROE of 17.7%, which was in line with the strong results reported in 2018. Solid loan growth drove higher net interest income and more than offset modest net interest margin compression. Fee income trends were solid, including a significant improvement in mortgage banking income. Despite continued investments in the franchise, expenses remain well contained, as evidenced by an efficiency ratio of 55% in 2019.

Overall, we view BOH’s balance sheet as strong and well positioned to cope with the adverse fallout from the coronavirus. Specifically, the balance sheet is underpinned by a substantial low-cost, core deposit base, which easily funds the loan portfolio (70% loans-to-deposits ratio). Moreover, DBRS Morningstar views BOH’s risk profile as strong, notwithstanding its loan portfolio being heavily dependent on real estate and geographically concentrated in Hawaii (91% of loan portfolio is located in Hawaii). Additionally, asset quality metrics remain pristine, with very low levels of nonperforming assets and net charge-offs (2019 NCO ratio of 0.12%). Finally, capital metrics remain sound, despite an approximate 90 basis point decline in the Company’s common equity tier 1 ratio (CET1) during 2019 (to 12.1% at YE19) due to increased capital management activity.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $18.1 billion in assets at December 31, 2019.

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

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

The principal methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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