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 islands. In addition, the Company has consistently generated strong financial results, while sustaining sound balance sheet fundamentals, including in 2020. The impact of the Coronavirus Disease (COVID-19) and low interest rate environment, which has weakened earnings and asset quality, has also been factored into the ratings.

The ratings also consider BOH’s dependence on the Hawaiian economy that was particularly hard-hit in 2020, but has modestly improved in recent months, which we expect to continue over the course of 2021. While the Company maintains a high level of real estate exposure, substantially all of which is located within Hawaii, real estate values have been quite resilient during economic downturns, including in 2020, and are supported by a limited supply.

RATING DRIVERS
DBRS Morningstar views BOH as well placed within its rating category. Over the longer term, an upgrade of the ratings would occur if the Company can grow its fee-based businesses to further diversify its revenue generation. Conversely, a downgrade would occur from sustained asset quality deterioration combined with a prolonged negative impact on profitability.

RATING RATIONALE
BOH benefits from having a strong brand and relatively limited amount of competition within the Hawaiian Islands. The Company operates the most branches in Hawaii, has the second largest deposit market share at 34%, and is the top residential mortgage provider in the state.

We view BOH’s earnings power as strong, having generated a double-digit return on equity (ROE) for 18 consecutive years, including in 2020. While income before provisions and taxes (IBPT) remained in line with recent years, net income declined 32% compared to 2019 primarily due to an outsized provision for credit losses, reflecting reserve building for the economic fallout from COVID-19 and the adoption of CECL.

Consistently strong asset quality and conservative underwriting continues to be a hallmark of the Company. Asset quality metrics remained pristine in 2020, with a net charge-off ratio of just six basis points, but we expect some deterioration from this low level during 2021. Positively, 78% of the loan portfolio (excluding PPP loans) is secured with real estate with a combined average loan to value of 56%, providing a substantial buffer even if real estate values weaken. Additionally, loan balances on deferral have improved considerably and were down to 3.6% of total loans at the end of January 2021.

Balance sheet fundamentals remain robust, proving key support to the ratings. BOH’s funding and liquidity is underpinned by a substantial low-cost, core deposit base, which easily funds the loan portfolio (66% loans-to-deposits ratio). Capital metrics are solid, with a CET1 ratio of 12.1% at YE20. The Company has maintained its dividend, but share repurchases have been suspended since March 2020.

Bank of Hawaii Corporation, a diversified financial services provider headquartered in Honolulu, HI, reported $20.6 billion in assets at December 31, 2020.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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