NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of First Hawaiian Bank (FHB) at 'A' and removed the rating from Rating Watch Negative, which was initiated on Feb. 2, 2016. The Rating Outlook is Negative. Concurrently, FHB's Viability Rating (VR) was affirmed at 'a-'. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating affirmation reflects Fitch's view that BNP Paribas' (BNPP, IDR at 'A+' and VR at 'a+') ownership interest in FHB remains significant, which subjects it to the Federal Reserves "source of strength" and full consolidation. Fitch believes BNPP will be required to continue to support FHB, if necessary, until and unless its ownership falls below 25%. Following the partial IPO in August 2016, BNPP beneficially owns approximately 83% of FHB's outstanding common stock and fully consolidates FHB in its financial statements.
Fitch expects BNPP's ownership in FHB to decline over time given BNPP's expressed intention to divest the controlling interest, subject to market conditions and other considerations. However, the timing of the divesture is not mandated or certain. The Negative Outlook captures this uncertainly over the longer horizon.
Historically, Fitch considered FHB as strategically important to BNPP and that BNPP would have a very high propensity to support FHB, as reflected in its wholly-owned interest in FHB for an extended period of time. FHB's Long-Term IDR received one-notch uplift because of this very high support assumption.
The affirmation of FHB's VR at 'a-' incorporates Fitch's view that the separation from BNPP does not have a material impact on FHB's intrinsic franchise or credit profile. Fitch expects that FHB will maintain its strong operating performance, which is underpinned by the bank's Hawaiian-focused strategy with a leading market position in the state. The bank has high capital and profitability ratios and strong through-the-cycle asset quality.
Fitch views FHB's leading market position with nearly 37% deposit share in Hawaii as sustainable and a key rating strength. A combination of Hawaii's distance from the mainland, its relatively small population, and intense local competition has produced high barriers to entry for mainland banks. Hawaii's economy has also fared noticeably better than the U.S. overall with lower unemployment rate, even during the last recession. These characteristics partially mitigate FHB's geographical concentration risk. Nonetheless, FHB remains more geographically concentrated versus larger bank peers.
Like other Hawaiian banks, the company benefits from Hawaii's unique deposit pricing characteristics, which have proven to be quite inelastic. Cost of deposits is lower and these do not reprice as quickly compared to other markets in the U.S. At its peak in 2007, FHB's cost of total deposits was 1.52%, nearly 100 basis points (bps) lower than that of U.S. bank peers. Moreover, non-interest-bearing deposits account for 34% of total deposits at the end of second quarter 2016 (2Q16), a respectable ratio. FHB's robust liquidity position stemming from a large base of sticky and low cost deposits helps to mitigate its interest rate risk despite holding a sizable residential mortgage loan portfolio, 32% of total loans at the end of 2Q16.
FHB's capital adequacy is solid and remains in the top quartile when compared to large U.S. banks despite FHB's recent capital distribution to its holding company, First Hawaiian, Inc., prior to the partial IPO. FHB returned $364 million, which reduced its CET1 by 272bps. At June 30, 2016, FHB's CET1 ratio was 12.5%, compared to 10.8% for the median of large U.S. regional bank peers. Fitch expects FHB's capital position to remain strong given the bank's earnings generation, its low credit loss history and FHB's prudent capital management.
FHB's profitability is better than peers. During 2015, FHB earned an ROA of 126bps, compared to about 100bps for the large regional bank peer average. The bank's earnings profile benefits from a very efficient cost structure, low funding costs, and modest reserve builds. Given modest credit losses through the financial crisis, FHB performed very well during this period, with its ROA averaging a robust 1.7% through the years 2007-2010. The bank's overhead ratio was 41.5% for 2Q16, the lowest compared to large U.S. regional bank peers. Going forward, Fitch expects FHB's strong efficiency to be partially offset by higher costs as it absorbs some of the costs it previously benefited from being part of BNPP. These impacts could potentially translate to lower returns, though Fitch expects FHB's profitability to remain above peers.
FHB also has very good asset quality metrics with nominal loan losses, especially in the last five years. Net charge-offs peaked at 73bps in 2010, well below industry averages. The superior performance is attributable to FHB's strong underwriting discipline, its relatively low exposure to mainland lending, and the fact that real estate property value in Hawaii has continued to outperform the U.S.
Fitch believes that BNPP has the ability and requirement to provide support to FHB if necessary, as discussed above.
Since this support is based on institutional support, as opposed to sovereign support, there is no Support Rating Floor assigned.
LONG- AND SHORT-TERM DEPOSIT RATINGS
FHB's long-term deposit ratings are rated one notch higher than the company's IDR, and reflect depositor preference for U.S. banks, and the superior recovery prospects for deposits resulting from depositor preference.
FHB's IDRs would be sensitive to further material changes in BNPP's ownership or changes to BNPP's own ratings.
Fitch sees limited future upward pressure on the VR. FHB's geographical concentration makes it vulnerable to any downside impact of the local economy, which depends highly on tourism and federal military presence. This coupled with a sizable residential real estate lending concentration in the state makes any future upgrade unlikely.
In addition, FHB's ratings are sensitive to any negative impacts from federal military budget cuts or a sustained decline in tourism, measured by visitor arrivals and expenditures. Fitch views FHB's high capital as one of the key credit strengths, thus any potential changes to capital philosophy such as a more aggressive dividend payout policy or share buyback program that significantly reduces capital ratios could result in downward rating pressure.
Any potential changes to risk appetite such as more aggressive overall loan growth or a significant increase in the mainland loan exposure could also result in downward rating pressure. Fitch views this is unlikely given that FHB has long demonstrated its commitment to the Hawaiian market.
Future rating actions on the Support Rating will depend on BNPP's ownership interest in FHB. An expectation of a further reduction in the common stock ownership to less than 25% will likely result in a downgrade of the Support Rating as BNPP will no longer be subject to Federal Reserve's source of strength requirement and support therefore can no longer be relied upon. In such event, the Support Rating will likely be lowered to '5' from '1'.
LONG- AND SHORT-TERM DEPOSIT RATINGS
FHB's long-term deposit ratings are one notch higher than the company's IDR, while FHB's short-term deposit rating at 'F1' is linked to the long-term IDR per Fitch's rating criteria. The long-term deposit rating is sensitive to changes in the company's IDR.
Fitch has taken the following rating actions:
First Hawaiian Bank
--Long-Term IDR removed from Rating Watch Negative and affirmed at 'A'; Outlook Negative;
--Long-term deposits removed from Rating Watch Negative and affirmed at 'A+';
--Support rating removed from Rating Watch Negative and affirmed at '1';
--Short-Term IDR affirmed at 'F1';
--Short-term deposits affirmed at 'F1';
--Viability rating affirmed at 'a-'.
Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 15 Jul 2016)
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