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 consistently generates strong financial results, while sustaining sound balance sheet fundamentals. The ratings also consider BOH’s dependence on the Hawaiian economy and its high level of real estate exposure, substantially all of which is located within Hawaii, where real estate values have been quite resilient during recent economic downturns and are supported by a limited supply.
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.
Franchise Combined Building Block (BB) Assessment: Strong
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 largest deposit market share at 34%, and is the top residential mortgage provider in the state.
Earnings Combined Building Block (BB) Assessment: Strong/Good
We view BOH’s earnings power as strong, having generated a double-digit return on equity (ROE) for 19 consecutive years, including in 2021. The Company reported $253 million of net income in 2021, which was up 65% from the prior year, as bottom line results benefited from a sizable recapture of loan loss provisions recorded in 2020.
Risk Combined Building Block (BB) Assessment: Strong/Good
Consistently strong asset quality and conservative underwriting remains a hallmark of the Company. Asset quality metrics remained pristine in 2021, with a net charge-off ratio of just five basis points. We note that 78% of the loan portfolio (excluding PPP loans) is secured with real estate (both residential and commercial), with a combined average loan to value of 56%, providing a substantial buffer if real estate values were to weaken.
Funding and Liquidity Combined Building Block (BB) 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 (60% loan-to-deposit ratio), as well as a high-quality investment securities portfolio. Benefiting from excess liquidity in the system, deposit growth remained strong in 2021, with further mix improvement.
Capitalization Combined Building Block (BB) Assessment: Strong
Capital metrics remain solid, with a CET1 ratio of 12.1% at YE21. The Company resumed share repurchases in the second half of 2021 and returned $138 million to shareholders through dividends and buybacks in 2021. We note that BOH executed its inaugural preferred stock issuance in June 2021, bolstering its Tier 1 capital and leverage levels.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/395025
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.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the 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.
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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
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