Rating Action: Moody's affirms Bank of Hawaii's ratings (A2 long-term issuer); changes outlook to negative from stable
Global Credit Research - 02 Sep 2020
New York, September 02, 2020 -- Moody's Investors Service, ("Moody's") has affirmed the ratings of Bank of Hawaii Corporation and its bank subsidiary Bank of Hawaii (collectively referred to as "BOH") and affirmed Bank of Hawaii's a1 standalone Baseline Credit Assessment (BCA). Bank of Hawaii Corporation has a senior unsecured medium term note program rating of (P)A2. Bank of Hawaii has long-term/short-term deposit ratings of Aa2/Prime-1 and a long-term issuer rating of A2. Moody's has also changed the outlook on Bank of Hawaii to negative from stable.
While the ratings affirmation reflects Moody's unchanged view of the bank's standalone credit profile, the outlook change to negative from stable reflects Moody's assessment that the bank's asset quality, capitalization and profitability will be under increased pressure due to the contraction in the Hawaiian economy in 2020, as a result of the coronavirus pandemic. Moody's expects the economic downturn will be more pronounced in the State of Hawaii (Aa2 stable) than in the US mainland because its economy is heavily reliant on tourism, which has been negatively impacted by the pandemic. Moody's regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.
..Issuer: Bank of Hawaii Corporation
....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2
..Issuer: Bank of Hawaii
.... Adjusted Baseline Credit Assessment, Affirmed a1
.... Baseline Credit Assessment, Affirmed a1
....LT Counterparty Risk Assessment, Affirmed Aa3(cr)
....ST Counterparty Risk Assessment, Affirmed P-1(cr)
....LT Counterparty Risk Rating (Local Currency), Affirmed A1
....LT Counterparty Risk Rating (Foreign Currency), Affirmed A1
....ST Counterparty Risk Rating (Local Currency), Affirmed P-1
....ST Counterparty Risk Rating (Foreign Currency), Affirmed P-1
....LT Issuer Rating, Affirmed A2, Negative from Stable
....LT Bank Deposits, Affirmed Aa2, Negative from Stable
....ST Bank Deposits, Affirmed P-1
..Issuer: Bank of Hawaii
....Outlook, Changed To Negative From Stable
The affirmation of Bank of Hawaii's a1 BCA, which is two notches higher than the a3 median of rated US banks, and the ratings for BOH, reflects BOH's strong financial profile, supported by a leading market position in Hawaii and a conservative credit culture that has resulted in historically strong credit quality. The bank's liquidity is robust, with a large core deposit base, limited refinancing risk owing to a low reliance on confidence-sensitive market funding, and sizeable holdings of liquid resources, making the bank resilient to market shocks. A risk-averse strategy has sustained its strong asset quality. Its strong and stable profitability has been the result of contained credit costs, along with its low deposit costs and good operational efficiency. BOH's long-established Hawaiian banking franchise, while a credit strength, also presents a geographic concentration risk in that operating in one small economy makes the bank's risk profile more vulnerable to localized economic downturns. Approximately 91% of its loan portfolio was based in Hawaii as of 30 June 2020, with the remaining portion based in Guam (5%) and the US mainland (3%).
In prior economic downturns, BOH outperformed most US peers as a result of its solid pre-provision earnings, underpinned by its conservative credit culture, and the stability of the Hawaiian economy relative to many US states, which contributes to BOH's a1 BCA being positioned two notches above the current a3 median of US banks. Specifically, its BCA has incorporated Moody's expectation of better than peer capital resilience in stress scenarios. However, the impact of the coronavirus outbreak on the state and its tourism industry are likely to result in a more severe economic decline than the remainder of the US, where the weakened tourism sector is not as large of a concentration risk in the local economies. The top employment sectors in the state of Hawaii are leisure and hospitality services and government, each accounting for about 19% of state employment at the end of 2019. As a result of the disruption in visitor arrivals and the efforts to stem the outbreak, Moody's believes BOH's above-median ratings and its performance are more at risk relative to most US banks, which also face difficult operating conditions.
Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative rating outlook, upward ratings movement is unlikely over the next 12 to 18 months. The outlook could return to stable if BOH's asset quality and profitability show continued resilience to the economic effects of the coronavirus in the form of better than peer performance, and if it maintains a stronger level of capitalization relative to its lower rated peers.
Sustained decrease in profitability because of elevated credit costs, a decline in capitalization or a decline in liquid resources as a percentage of tangible banking assets would also lead to downward rating pressure. A downgrade of the BCA and the ratings could also result from expansion initiatives, which would not complement Bank of Hawaii's island-based regional banking franchise and that could in turn result in a worsening of asset quality.
The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Rita Sahu, CFA VP - Senior Credit Officer Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 M. Celina Vansetti-Hutchins MD - Banking Financial Institutions Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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