Bank of Hawaii Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Bank of Hawaii Corporation is a regional bank holding company primarily operating in Hawaii and other Pacific Islands. Its core business is providing financial products and services to consumers, businesses, and governments in these locations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Bank of Hawaii Corporation (BOH) operates primarily in Hawaii and other Pacific Islands. It’s important to note it does not operate in the mainland United States. They have a network of branches and ATMs in these locations and also provide their services digitally.

The business operates across three core segments:

  • Consumer Banking: This segment offers a wide variety of products to consumers including mortgages, credit cards, checking accounts, and savings accounts.
  • Commercial Banking: This segment serves business customers, offering commercial real estate loans, credit lines, and other financial services.
  • Treasury & Other: This segment includes treasury-related functions, such as investing, liquidity management, and capital management. They also offer other financial services here.

The core goal of Bank of Hawaii is not to become a large national or international bank. They focus on serving and growing their local economies and markets.

The bank’s strategic approach involves creating value through: * Enhancing the customer experience and providing a wide array of convenient products and services. * Being a partner of choice in the local communities by supporting the economy. * Utilizing advanced technology for efficient operations and customer access. * Following strict financial management and risk reduction strategies.

The banking industry is facing several changes: * The adoption of digital banking is increasing, leading to decreased foot traffic in physical locations. This means banks must invest in their digital infrastructure for growth. * Interest rates are fluctuating, which affects net interest margins, and thereby overall profitability. * Increased compliance burdens and regulatory oversight create more challenges for banks. * Competition from other banks and also from emerging FinTech companies. * In the Hawaiian market, the competition is relatively fragmented, with numerous smaller banks and credit unions competing for market share.

However, the banking industry in Hawaii is quite different from that in the mainland. There are less big players and the culture is very focused on local and relationships.

What Differentiates BOH? * Strong local brand and customer loyalty, especially on the island. * A focus on the local communities, which improves its connection to its customer base. * Deep integration into the economy of Hawaii. * Its relatively conservative nature in managing risk.

Moat Analysis

The moat of Bank of Hawaii is rated a 2 out of 5.

An economic moat describes a company’s ability to maintain its competitive advantage over time, usually leading to higher profitability.

BOH possesses a narrow moat, primarily due to: * Brand recognition and customer loyalty: They have high brand recognition on the island and its consumers generally prefer their products over those of other banks. This makes it difficult for competitors to convince them otherwise. * High switching costs: The process of switching a primary banking account can be difficult and thus the consumer might not switch even for slightly better rates from other banks. * Local dominance and economies of scale: Because of its size and local focus, the bank has become more operationally efficient than other players. Their larger network and branches help attract and retain customers. However, there are several problems that make this not a wide moat: * No unique process or IP. They do not use some unique tech or method to earn higher returns. Instead, they use the normal methods like any other regional bank. * Local market limitations: They are limited by the economics of the local market in which they operate, so their expansion is limited. * The regulatory approval to operate in the finance industry is easy. There are plenty of smaller players, and new players can compete with them at a faster pace than other industries.

Legitimate Moat Risks and Business Resilience

The following risks could hurt the bank’s moat and its ability to operate:

  • Economic downturn in Hawaii or the Pacific Islands. Given their core geographic focus, a downturn in this region would drastically impact their performance. * Increased competition from other banks and credit unions: Competition among local institutions may erode customer loyalty and pricing power. There are also new disruptive fintech companies in the market that may erode the bank’s edge. * Changes in regulations: Changes in banking regulations will make things more difficult. * Cybersecurity threats: Cyberattacks may cause huge losses to banks by reducing the confidence in them. If a customer’s data is breached, they might leave the bank.
  • Macroeconomic changes: Sudden spikes in the inflation or interest rates can cause instability.

Resilience: Bank of Hawaii seems to have a relatively sound business resilience, as they have been profitable for a long time, have a good history of operations, and high brand loyalty in their region, which helps them get over temporary setbacks. However, external factors could hurt their business in the long-term. They are not well-positioned to make changes and keep their competitive edge because they are not technologically advanced, their target customers are more local and may not have the flexibility, and they cannot expand easily since they are a regional bank.

Financial Overview

In the past years, the bank’s revenue growth has been volatile because of fluctuations in the regional economy and interest rates. They have relied heavily on net interest income. Their non-interest income has been on an uptrend, but it is not a big part of their business. Operating margins have been decent, but are still influenced by changes in interest rates and cost of funds.

The key financial metrics for bank performance are ROE (Return on Equity), ROA (Return on Assets), and Net Interest Margin (NIM).

  • Over the last few years, their Return on Equity (ROE) has seen slight fluctuations, mainly influenced by factors such as interest rate changes and loan losses.
  • The Return on Assets (ROA) also is relatively steady, however, this number is low as compared to industrial companies.
  • The net interest margin has been very volatile given the fluctuations in interest rates and the economy. It is still good, but quite lower than what many other companies are achieving.
  • In terms of expenses, they have a good mix of expenses that are needed to keep the bank operating efficiently.

Recent Results and Updates: Recent earnings calls reveal a decrease in net interest income due to interest rate fluctuations and increase in costs. However, they have seen good growth in non-interest income. The management thinks these are temporary setbacks due to a weak market and plan on continuing to improve operating margins and cost management. As of the latest report, their allowance for credit losses are higher as compared to previous periods, indicating the need to be conservative given the current market situations. Their regulatory capital ratios remain higher than the minimum requirements and they have very little trading risks.

Understandability

The business understandability is rated 2 out of 5. It is very easy to understand the fundamental aspects of their business, i.e. that it’s a bank that lends and takes deposits in the Hawaii region. However, the financial statements are very complex and it can be very hard to assess what their actual margins and growth are. They have various kinds of businesses, all with their own metrics and numbers that make it difficult to understand the company overall.

Balance Sheet Health

The balance sheet health of BOH is rated 4 out of 5.

  • They maintain good levels of capital reserves well over the regulatory requirements, even if they are not high in the banking sector.
  • Their debt levels are modest and not a major cause of concern. Their leverage is not too high and therefore the risks of over borrowing or a debt crisis is low.
  • Their asset quality is also relatively good with only a few problem loans. In most of their reports, the allowance for bad loans has been small compared to overall loans. However, there are still problems:
    • A lot of their assets are loans, which are by nature, illiquid. It is difficult to liquidate them without significant losses.
    • The balance sheet is very sensitive to changes in interest rates.

Summary

Bank of Hawaii is a regional bank with a fairly good moat, but that is mostly limited to Hawaii. As such, their business is limited to a particular region. They also have a fairly healthy balance sheet and decent business practices. However, it can be very difficult to understand their financials due to complicated revenue streams. The company’s strengths lie in its local presence and customer relationships, but they face challenges from the changing financial landscape.