DBRS Confirms Bank of Hawaii Corporation at A (low); Trend Stable

DBRS has today confirmed the ratings of Bank of Hawaii Corporation (BOH or the Company) and its bank subsidiary, Bank of Hawaii, including BOH’s Issuer and Senior Debt rating of A (low). The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

BOH’s ratings are underpinned by a strong banking and deposit franchise in Hawaii, continuing above-peer group average profitability and strong asset quality. The ratings also consider the Company’s dependence on the Hawaiian economy, its modest loan and deposit growth prospects, and the relatively high relationship exposures in its loan portfolio. The Stable trend reflects DBRS’s view that BOH has the requisite market strengths and credit discipline to continue producing strong operating results while maintaining healthy credit fundamentals.

The Company delivered a solid year in 2007 and was able to avoid many of the problems that have plagued the banking industry of late. Indeed, net income improved over 2006 and credit quality remained strong. Fee income growth across all segments more than offset NIM compression, higher provisioning costs and several one-time expense items. In a very difficult year for the industry, DBRS notes positively that the Company still managed to deliver on its financial goals of positive operating leverage, a ROA above 1.7% and a ROE above 25%.

Asset quality remains strong. Non-performing assets (NPAs) rose to a still low 0.08% of loans and leases in the fourth quarter from 0.06% in the previous quarter, but down from 0.10% in Q4 2006. NPAs did rise in most asset classes, but remain at historically low levels. Meanwhile, net charge-offs (NCOs) totaled a manageable 0.24% of average loans and leases. NCOs did modestly increase in 2007 primarily due to deterioration in auto and unsecured consumer loans and leases. To address the deterioration, the Company has tightened underwriting standards for these types of loans. Meanwhile, residential-related loans are performing well and are conservatively underwritten. Positively, the unemployment rate in Hawaii remains very low, but inflation has made the cost of living more expensive for consumers. DBRS believes that further erosion in BOH’s asset quality is likely, especially since NPAs remain at historically low levels and the national economy appears to be headed towards or is already in a recession. Furthermore, higher airline prices due to high oil prices could negatively impact tourism. To date, DBRS notes that there has been no significant deterioration in visitors to Hawaii.

While still ranked second in Hawaii with a 28.4% deposit market share, BOH did modestly improve its market share over the past year. With the largest footprint and high customer service marks, BOH is well positioned to grow its deposit base. Full-service brokerage, trust services, insurance brokerage and other fee- and commission-based products accounted for 37.9% of total revenues in 2007 and contribute to the Company’s sufficient earnings diversification. Low-cost core deposits, amounting to nearly 100% of loans, provide ample liquidity for the bank and contribute to both BOH’s profitability and earnings stability.

The Company targets a 7% leverage ratio when managing its capital base. With more limited growth opportunities, BOH has been returning excess capital to shareholders through dividends and share repurchases. Without any balance sheet issues, BOH is actively repurchasing shares and will continue to do so in 2008. Overall, capital metrics are in line with those of similarly rated peers.

The holding company’s stand-alone risk profile is sound. Double leverage is not material at 103% (at December 30, 2007), and the holding company has ample unencumbered liquidity of its own, and access to other assets, to cover its operating expenses and debt service obligations.

Upward ratings momentum could result from material improvement in loan granularity together with capitalization rising to levels commensurate with higher-rated banks. Negative ratings pressure could result from marked and sustained deterioration in asset quality that would lead to weaker earnings.

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