NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of First Hawaiian Bank (FHB) at 'A' and Viability Rating (VR) at 'a-'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.
This action follows Fitch's recent rating action on BNP Paribas (BNPP). Please refer to Fitch press release titled 'Fitch Affirms BNP Paribas at 'A+'; Outlook Stable' dated Dec. 13. 2016 for additional information on the BNPP rating action.
KEY RATING DRIVERS
The rating affirmation reflects Fitch's view that BNPP (IDR 'A+' and VR '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, which could extend beyond the typical 18 to 24 outlook period.
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 affirmed the following ratings:
First Hawaiian Bank
--Long-Term IDR at 'A'; Outlook Negative;
--Long-term deposits at 'A+';
--Support rating at '1';
--Short-Term IDR at 'F1';
--Short-term deposits at 'F1';
--Viability rating at 'a-'.
Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 25 Nov 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.