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
IDRs
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.
VR
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.
SUPPORT RATING
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.
RATING SENSITIVITIES
IDRs
FHB's IDRs would be sensitive to further material changes in
BNPP's ownership or changes to BNPP's own ratings.
VR
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.
SUPPORT RATING
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
Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)
https://www.fitchratings.com/site/re/891051
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016491
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https://www.fitchratings.com/regulatory
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Fitch RatingsPrimary AnalystThuy
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