Bancorp Hawaii and First Hawaiian Inc. are on islands of their own - in more ways than the obvious.
While mainland banking companies continue first-half trends, reporting robust third-quarter profits and much-improved asset quality, Hawaii's two dominant banking companies are not keeping pace.
Reflecting their contrasting outlook, the stocks of the two Hawaii banks lag behind their industry peers, as they have all year. The Salomon Brothers 58-bank composite is up about 10.5% so far this year, compared with a drop of nearly 10% for Bancorp Hawaii and a 7% decline for First Hawaiian.
Earnings Below Expectations
Bancorp Hawaii, which has $11.7 billion in assets, reported a $31.7 million profit for the third quarter, up a steady but subdued 11% from 1991. The per-share figure of $1.12, up 10%, was 3 cents below analysts' expectations.
The $6.5 billion-asset First Hawaiian had a 5% increase, to $21.2 million, or 66 cents a share. Analysts had expected 71 cents.
"The nation's continuing lackluster recovery and Hawaii's slower economic pace require that we proceed cautiously, while at the same time eyeing opportunities which will further our performance over the long term," said Bancorp Hawaii's chairman and chief executive officer, H. Howard Stephenson.
"The Hawaiian economy always has and will continue to lag the mainland," says Jeffrey Naschek, a Salomon Brothers analyst. "Hawaii's main concern right now is a prolonged recession in the U.S. economy.
Loan Quality Worsens
Echoing the mainland economic slowdown, Hawaiian construction is down considerably and problem loans have risen. The retail and lodging industries are off as tourism suffers. People who are traveling to the islands stay fewer days and spend less.
At the same time, the banks are faced with a slowing Japanese economy. Japan is also an important source of revenue.
While analysts had been expecting a rise in credit problems, they say the increases will be on top of a low base, and the banks are well-reserved.
Bancorp Hawaii's loss reserve to total loans and leases equaled 1.95% on Sept. 30, up from 1.76% a year earlier. Return on average assets improved seven basis points to 1.09%, while return on equity slipped to 16.28% from 16.46%.
Rise in Bad Loans
First Hawaiian's annualized ROA through Sept. 30 contracted to a still-strong 1.31%, from 1.38%, and ROE to 16.65%, from 17.74%.
First Hawaiian's nonperforming assets to total loans and other real estate owned expanded to 1.66%, from 0.62% a year earlier, but First Hawaiian's chairman and CEO, Walter A. Dods, Jr., pointed out that it was still well below its peer-group average of 3.65%.
"In absolute terms, the [bad-loan] numbers, even if they're going up, are some of the best in the industry," said Thomas McCandless of Goldman Sachs. "The problem is, they're going in the wrong direction."
"These companies will still have some of the best financial ratios in the industry," he said, citing, among other things, healthy returns on assets and low operating overheads.
Mr. Dods at First Hawaiian hailed its modest earnings increase amid "the pressures of the low-interest environment and a slowing Hawaii economy . . . . The company continues to focus on introducing new products and services while containing costs across the company."
Pressure on Margins
Lingering effects of price wars among the major island banks in the first half will likely keep net interest margins relatively tight. Bancorp Hawaii's margin on earning assets - 4.07% for the third quarter - faces additional pressure from its heavy reliance on the low-margin business of managing state funds.
And then there is the aftermath of Hurricane Iniki on Kauai to contend with. While the storm's wreckage could stimulate spending, it could also dampen further the important tourist trade.
In its earnings announcement last week, Bancorp Hawaii mentioned both Iniki and Typhoon Omar, which hit its Guam market.
But bank operations, it said, sustained minimal damage, and financial aid is pouring into the affected markets.