Morningstar DBRS Confirms Bank of Hawaii Corporation's Long-Term Issuer Rating at "A" With a Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Bank of Hawaii Corporation (BOH or the Company), including its Long-Term Issuer Rating of "A." At the same time, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Bank of Hawaii (the Bank). The trend for all credit 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 CREDIT RATING CONSIDERATIONS
The credit ratings confirmation and Stable trend reflect BOH's strong banking franchise that is underpinned by a deeply entrenched presence within Hawaii, including the leading deposit market share. In addition, the Company consistently generates solid financial results, while sustaining sound balance sheet fundamentals. The credit ratings also consider BOH's dependence on the Hawaiian economy, with its somewhat limited set of underlying economic sectors and the possibility of negative repercussions from certain proposed tariff policies. Furthermore, we view as a concentration BOH's high level of real estate exposure (both residential and commercial), substantially all of which is located within Hawaii. However, Hawaiian real estate values have been quite resilient during recent economic downturns and are supported by a limited supply and geographic limitations. Additionally, we also considered unrealized losses in the held to maturity securities portfolio and their potential impact on earnings and capital if in the unlikely scenario that these losses were realized.

The Bank's Intrinsic Assessment of A (high) has been assigned at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views BOH's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
Over the longer term, the credit ratings would be upgraded if the Company can grow its fee-based businesses to enhance revenue diversification, while maintaining strong credit metrics and capital levels. Conversely, the credit ratings would be downgraded if there is substantial asset quality deterioration that results in sustained weaker earnings.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good / Moderate
BOH benefits from having a strong brand and leading deposit market shares in Hawaii and somewhat limited amount of competition from larger banks within the Hawaiian Islands. The Company operates the most branches in Hawaii and holds about a third of the total deposit market share. In addition, the Company is the top residential mortgage loan provider in the state.

Earnings Combined Building Block Assessment: Good
We view BOH's earnings power as sound. The Company reported $150 million of net income in 2024, which was down 12% from 2023, reflecting ongoing pressure on net interest income in the current interest rate environment and a higher provision for credit losses, partially offset by lower operating expenses. Still, returns remained sound including a Return on Average Common Equity (ROACE) of 9.78% for 2024. BOH's loan portfolio is about 60% fixed rate loans, which limits the asset sensitivity of the Company's balance sheet. Moreover, a large, albeit high quality, securities portfolio that is lower yielding given the rapid interest rate increases from the Fed to combat inflation will also be a headwind if higher rates persist. These concerns are partially mitigated by BOH's large, stable, and low-cost deposit base.

Risk Combined Building Block Assessment: Strong / Good
Consistently strong asset quality and conservative underwriting remain hallmarks of the Company. Asset quality metrics remained pristine in 2024, with a net charge-off ratio of just 9 basis points for 2024 and NPAs, representing 0.14% of total loans at YE2024. We note that 79% of the loan portfolio is secured with real estate (both residential and commercial), with a weighted average loan-to-value ratio of 51%, providing a substantial buffer if real estate values were to weaken. Additionally, CRE office accounts for just 3% of total loans.

Funding and Liquidity Combined Building Block Assessment: Very Strong / Strong
BOH's funding and liquidity is underpinned by a substantial low-cost, core deposit base, which easily funds the loan portfolio (68% loan-to-deposit ratio at YE2024), as well as a high-quality investment securities portfolio. For 2024, deposits decreased 2% YOY, reflecting a 10% decline in noninterest bearing demand deposits, partially offset by growth in other deposit categories. Still, low-cost demand deposits (both noninterest bearing and interest bearing) represent 44% of total deposits. In addition, the Company has $10.0 billion in readily available liquidity, which exceeds the $8.6 billion in uninsured and uncollateralized deposits. The investment securities portfolio was $7.3 billion at December 31, 2024, and remains largely composed of low-credit risk securities issued by U.S. government agencies and U.S. government-sponsored enterprises. While elevated interest rates have caused unrealized losses on the securities portfolio of about $1.03 billion, the Company continues to reduce investment securities to increase liquidity and decrease market risk.

Capitalization Combined Building Block Assessment: Strong / Good
Capital metrics remain sound, with a YE2024 CET1 and tier I capital ratio of 11.59% and 13.95%, respectively, representing a substantial buffer above regulatory requirements. The Company has also showed a steady improvement in its TCE to TA ratio, which ended the year at 5.48%, up 41 basis points from YE2023. The improvement represents overall higher capital levels as well as a reduction in investment securities and lower unrealized losses YOY. However, the high dividend payout ratio reduces financial flexibility.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/449441.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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 4, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024 https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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