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Bank of Hawaii (NYSE:BHC) is Hawaii’s second largest bank, with 28% of bank deposits in Hawaii and $10.5 billion in total assets.^[1][2] The company earns 43% of its revenues from its commercial and residential mortgages and another 31% from the fees that it charges to manage its clients’ investment accounts.^[3] The rest of the company’s revenue comes from the insurance products it offers, its credit card business, and the commercial and construction loans and leases it finances. ^[4] Bank of Hawaii operates exclusively on Hawaii, Guam, nearby Pacific islands, and American Samoa. ^[5] BOH's conservative lending practices have shielded the company from the financial losses that have plagued other banks in the wake of the subprime lending crisis and U.S. housing market downturn. The bank does not hold any subprime mortgages.^[6] That's said, like most banks, it makes a significant portion of its revenue from residential and commercial real estate loans. Home values in Hawaii, the company's primary market, tumbled in 2008, reducing demand for the company's services. The banks concentration in Hawaii, also makes it vulnerable to economic downturns in the state.Rising airfares coupled with a general economic slow down have led to declining tourism in 2008. According to NBC news, major airlines plan to cut service to Hawaii by 15% during 2008 and by an additional 25% in 2009. ^[7] This is very significant for a state that relies heavily on tourism.

Business Overview and Financial Performance

Business Overview

Bank of Hawaii Corporation operates as a diversified financial services company in the Central Pacific region through its primary subsidiary, Bank of Hawaii. Operating in over 70 branch locations, Bank of Hawaii provides consumers and corporations with a diverse array of financial products and services. Bank of Hawaii separates its businesses into four main segments: Retail Banking, Commercial Banking, Investment Services, and Treasury.

Bank of Hawaii earns most of its net income through its Retail and Commercial Banking divisions, leaving it exposed to overall economic conditions in the US.^[8]

• Retail Banking (54% of Net income): The Retail Banking segment provides small businesses and individuals with residential mortgage loans, automobile loans and leases, retail property and casualty insurance products, checking accounts, savings accounts, and time deposit accounts. Bank of Hawaii operates 71 branch locations, 409 ATMs, an online banking service (e-Bankoh), and a telephone banking service.^[9]

• Commercial Banking (32% of Net Income): Bank of Hawaii's Commercial Banking segment provides companies in Hawaii with a wide range of financial products including: corporate banking, commercial real estate loans, lease financing, auto dealer financing, cash management products, and property and casualty insurance products. Commercial real estate mortgages are only offered to companies that are primarily based in Hawaii.^[10]

• Investment Services (11% of Net Income): The Investment Services business segment is further divided into the private banking, trust services, asset management, and institutional investment advisory sectors. The private banking and trust services sectors assist high net worth individuals in managing their wealth by offering investment, credit, and trust advisory services. The asset management sector of Investment Services manages and creates investment portfolios for its clients. The institutional sales and services sector acts as a full service brokerage, providing equities, mutual funds, life insurance, and annuity products. The majority of the revenues in the Investment Services segment come from fees that Bank of Hawaii charges customers to manage their assets.^[11]

• Treasury (3% of Net Income): The Treasury business segment earns revenues by providing corporations with asset and liability management services, including interest rate risk management. The Treasury division also provides a foreign exchange service to its customers.^[12]

Financial Performance

The financial results in Q1 2008 were positive for Bank of Hawaii as its net income was up $2.7 million from Q4 2007, and its non-interest income was $86.1 million up from $57.2 million in Q4 2007.^[13] However, there were two unique events that contributed to Bank of Hawaii’s increases in net income and non-interest income that are not likely to happen again, and the company’s non-interest expense rose compared to Q1 2007.^[14] In Q1 2008, the company received $12.5 million after taxes in non-interest income due to an initial public offering. The company also received $13 million after taxes in non-interest income because the lessee of a plane owned by the Bank of Hawaii decided to exercise an early buyout option.^[15] Both of these transactions are not likely to happen again, which means that without these transactions the company’s non-interest income was only $60.8 million in Q1 2008 compared to $57.2 million in Q4 2007.^[16] Noninterest expense was $93.4 million Q1 2008, up $11.3 million from noninterest expenses of $82.1 million in Q1 2007 and up $1.4 million from $92.0 million in Q4 2007.^[17] Adjusting for the two unique events, Bank of Hawaii’s non-interest expense was still $83.2 million, a $1.1 million increase from Q1 2007.^[18] Unless Bank of Hawaii Corporation stimulates growth in its business divisions it will probably not be able to sustain the growth it had in Q1 2008.

Trends & Forces

BOH is poised to avoids fallout from subprime lending

Because Bank of Hawaii was more conservative in its lending practices than many of its larger peers, it ended 2007 without any subprime loans on its books. In fact, Bank of Hawaii managed to increase its total non-interest income in Q1 2008 by 6% driven primarily by a $2.3 million increase in mortgage income.^[20] Despite these positive signs, real estate prices in the company's home market have fallen considerably, reducing demand for mortgages. Moreover, the rising default rates among prime lenders also pose a threat to the company. In 2007, the company's Retail Banking and Commercial Banking divisions account for 86% of BOH’s net income. ^[21]

BOH is exposed to the slowing US economy.

Because Bank of Hawaii operates exclusively in the US and does not plan on expanding its operations overseas, it is heavily dependent on the overall conditions of the US economy. According to the International Monetary Fund, global gross domestic product grew by an estimated 4.9% during 2007, but the U.S. GDP only grew by 2.2%, its lowest growth rate since 2002.^[22] Increases in Global GDP will increase consumer spending and directly increase the need for financial services that banks provide. Moreover in Hawaii, the bank's home market, tourism is a main staple. During economic downturns, tourism tends to suffer disproportionately.

Competitors

Bank of Hawaii's main competitors in Hawaii are First Hawaiian Bank, Central Pacific Financial, and American Savings Bank, a subsidiary of Hawaiian Electric Industries (HE). All competitors compete for market share in the Hawaiian islands, Guam, nearby Pacific islands, and American Samoa. Bank of Hawaii is the second largest bank holding company in Hawaii in terms of net income and revenue, behind First Hawaiian Bank, which is a subsidiary of BNP Paribas SA (BNPQY).

Unlike First Hawaiian Bank, Bank of Hawaii is not actively pursuing overseas expansion. First Hawaiian Bank has expanded its operating branches to Japan and Taiwan while Bank of Hawaii has not pursued any expansion strategies beyond the Central Pacific region, although it does hold foreign assets.^[27][28] This strategy makes Bank of Hawaii Corporation more vulnerable to the overall US economy, but allows it to focus on expanding its market share in the Central Pacific region.

As of March 31, 2008, Bank of Hawaii Corporation was ranked second in terms of domestic deposit market share in the Central Pacific region, behind First Hawaiian Bank.

References

1. ↑ Deposit Market Share Report for Hawaii as of June 30, 2007.
2. ↑ BOH 10-K 2007.
3. ↑ BOH 10-K 2007.
4. ↑ BOH 10-K 2007.
5. ↑ BOH 10-K 2007.
6. ↑ Bank of Hawaii profits, stock up. Pacific Business News.
7. ↑ Economic Downturn Expected to Affect Summer Tourism KNHL.com June 7, 2008
8. ↑ BOH 10-K 2007.
9. ↑ BOH 10-K 2007.
10. ↑ BOH 10-K 2007.
11. ↑ BOH 10-K 2007.
12. ↑ BOH 10-K 2007.
13. ↑ Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript. Seeking Alpha.
14. ↑ Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript. Seeking Alpha.
15. ↑ Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript. Seeking Alpha.
16. ↑ Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript. Seeking Alpha.
17. ↑ Bank of Hawaii Corporation Q1 2008 Financial Results. Business Wire. April 28, 2008.
18. ↑ Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript. Seeking Alpha.
19. ↑ BOH 10-K 2007.
20. ↑ Bank of Hawaii Corporation Q1 2008 Earnings Call Transcript. Seeking Alpha.
21. ↑ BOH 10-K 2007.
22. ↑ IMF World Economic Outlook (WEO) - Housing and the Business Cycle, April 2008.
23. ↑ BOH 10-K 2007.
24. ↑ Central Pacific Financial 10-K 2007
25. ↑ First Hawaiian Bank 2007 Annual Report.
26. ↑ Hawaiian Electric Industries 2007 Annual Report.
27. ↑ First Hawaiian Bank 2007 Annual Report.
28. ↑ BOH 10-K 2007.
29. ↑ Calculated using each firm's domestic deposits as a share of total domestic deposits from FDIC ID Key Statistics (as of March 31, 2008)