Bankoh sees rising rates giving boost to earnings

Bank of Hawaii Corp. anticipates rising interest rates will lead to improved earnings.

"It’s amazing how quickly things have changed in the interest rate environment," said Peter Ho, chairman, president and CEO of the state’s second-largest bank.

Historically low interest rates have been edging up, with the 30-year fixed mortgage rate rising more than 1 percentage point over the last two months. Last week it hit 4.37 percent, up from 3.35 percent in early May,.

The rise in rates, along with Hawaii’s improving economy, has made Ho optimistic that the bank will be able to grow its earnings after reporting Monday that net income fell 7.3 percent in the second quarter.

"The recent trend in higher interest rates should positively impact our operating earnings over time through improved net interest margin," Ho said.

Last quarter, the bank’s loan portfolio was up 3.3 percent from the year-ago period.

"Our loans reflected strong commercial lending growth, up 13 percent over last year, and consumer loan growth, up 18 percent from last year," Ho said. "Residential mortgage loans were lower in the quarter reflecting high levels of refinance activity in the market. We would anticipate higher mortgage balances moving forward as refinance activity moderates."

Rising rates should help grow Bankoh’s revenue because the bank will be able to reinvest its securities portfolio at higher rates, said Nashville, Tenn.-based analyst Brett Raba­tin of brokerage firm Sterne Agee.

In the second quarter the bank’s investment securities portfolio was worth $6.84 billion, down from $7.07 billion in the year-earlier quarter.

"The positive outlook is something investors will focus on from a 2014 perspective," Raba­tin said. "The big takeaway (from the earnings report) is that the environment for revenue growth looks a little better and Bank of Hawaii continues to keep its expenses under control."

Bankoh’s net income of $37.8 million, or 85 cents a share, beat analysts’ forecasts of 83 cents and sent its stock up 51 cents, or 0.9 percent, to $55.42 on the New York Stock Exchange. Earnings were announced before the market opened.

A year ago the bank had earnings of $40.7 million, or 90 cents a share.

Net interest margin — the spread between lending and deposit rates — decreased to 2.77 percent last quarter from 2.98 percent in the year-earlier period. That sent net interest income down 8.4 percent to $87.3 million from $95.4 million.

Noninterest income, which includes service charges and fees, rose 2.5 percent to $48 million from $46.8 million.

Ho said rising rates will result in more net interest income, but noninterest income likely will decrease. He said there will be a meaningful slowdown in the bank’s mortgage banking business in the near term as the refinance market potentially slows and prospective homebuyers are affected by tight housing inventory.

At the end of the second quarter, Oahu’s single-family home inventory was 2.7 months compared with 3.9 months in the year-earlier quarter, while condominium inventory was 2.7 months compared with 4.2 months at midyear 2012.

Still, Ho expects overall lending activity to be robust.

"The economy is really shaping up quite nicely," he said. "Unemployment is down to 4.6 percent, and the housing market is moving very sharply with a lot of demand. There’s no evidence of an oversupply of housing, and a lot of these construction projects — a dozen or so — are slated to go into construction in the next couple of years. Also, work being done on the rail has yet to make its presence felt in the marketplace. So essentially, we have another leg to go in the marketplace, which is construction. I’m pretty optimistic about the local economy here."

The quality of Bankoh’s loan portfolio showed continued improvement as the bank didn’t need to set aside any money for potential loan losses for the fourth straight quarter. Nonperforming assets — loans overdue 90 days or more — fell 12.2 percent to $36.4 million from $41.5 million a year ago.

Loans and leases as of June 30 were $5.9 billion, up from $5.7 billion in the year-earlier quarter, while deposits increased 4.4 percent to $7.9 billion from $7.6 billion. Assets fell 1.3 percent to $13.7 billion from $13.9 billion.

The state’s largest bank, First Hawaiian Bank, had assets of $16.6 billion.