Bank of Hawaii : 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 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. 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.

RATING DRIVERS
Over the longer term, the ratings would be upgraded if the Company can grow its fee-based businesses to enhance revenue diversification. Conversely, the ratings would be downgraded if there is substantial asset quality deterioration that results in sustained weaker earnings. A material deterioration in funding stability as a result of loss in deposit market share or higher than expected funding costs would also result in a ratings downgrade.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong / Good
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 and holds about a third of the total deposit market share. In addition, the Company 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 20 consecutive years, including in 2022. The Company reported $226 million of net income in 2022, which was down 11% % from 2021, when bottom line results benefited from a sizable recapture of loan loss provisions recorded in 2020. 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 mitigated partially by the stable, long term and low cost of deposits.

Risk Combined Building Block (BB) Assessment: Strong /Good
Consistently strong asset quality and conservative underwriting remain hallmarks of the Company. Asset quality metrics remained pristine and improved in some categories in 2022, with a net charge-off ratio of just four basis points. We note that 80% of the loan portfolio 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. BOH took a charge in 2022 to fully exit its remaining positions in leveraged leases on the mainland.

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 (66% loan-to-deposit ratio), as well as a high-quality investment securities portfolio. Relative to 2021, deposits were stable in 2022, and remain stable into March 2023, reflecting long-enduring commercial and consumer banking relationships, where the Company provides the main transactional accounts for households and businesses. Higher interest rates in 2022 caused unrealized losses on the securities portfolio of about $1.13 billion, and BOH increased its held to maturity (HTM) portfolio to 61% of total to avoid further reported AOCI losses. While this decreases BOH's flexibility around managing future liquidity, we view these risks as mitigated by the bank's unusually sticky and stable, long-enduring deposit base.

Capitalization Combined Building Block (BB) Assessment: Strong /Good
Capital metrics remain solid, with a CET1 ratio of 10.9% at YE22. The Company repurchased $55 million in shares in 2022 and returned $112 million to shareholders through dividends. BOH's well-capitalized CET1 ratio requirement is 6.50%, meaning that it has about 440 basis points in capital cushion, with a similar cushion to its Tier 1 capital requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/411668

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 http://www.dbrsmorningstar.com/research/373262.

Notes:
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.

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. [phone]

Contacts
Rebecca Clarke
Vice President, Credit Ratings, Financial Institutions Group - North American Financial Institutions
[e-mail]

Michael Driscoll
Managing Director, Head of NA FIG
[e-mail]