It’s harder for banks to make money in a low-interest-rate environment, but executives at Hawaii’s two largest financial institutions say an improving state economy and a pickup in construction should keep the momentum going.

Low numbers of mortgage delinquencies and foreclosures have created a better credit scenario for local banks, which don’t have to worry as much about defaults as do their mainland counterparts. Construction projects in Kakaako and future Koa Ridge and Ho‘o­pili developments in Leeward Oahu could provide the tonic to fuel lending.

"I think that Hawaii’s economy has fared better than many economies on the mainland," said Peter Ho, chairman, president and CEO of Bank of Hawaii, the state’s second-largest bank in assets. "This has created a better banking environment for Hawaii banks. As we look forward, we continue to see strong results in tourism in the visitor industry, and hopefully that will help keep the economy moving while we get some of these construction projects off the books and into construction."

Ho said that as long as the economy continues to remain stable in Hawaii, credit quality will remain benign.

Still, there are some concerns. Analyst Aaron Deer of San Francisco-based investment bank Sandler O’Neill & Partners LP said the spread between banks’ lending rates and deposit rates is putting considerable pressure on all banks’ net interest margins.

"This is by far the biggest challenge facing the banks, and it’s making revenue growth very difficult," said Deer, who covers Bank of Hawaii, Central Pacific Bank and Territorial Savings Bank for his firm. "However, with the Hawaii economy gaining momentum, the banks are benefiting from slightly improved loan demand from both commercial and retail customers. And, the improving economy means fewer borrowers are falling behind on loan payments, so credit losses continue to decline."

Hawaii economist Paul Brewbaker says local banks may be too cautious about lending despite the low number of mortgage delinquencies and foreclosures compared with the mainland.

"Lenders perceive a more risky environment in Hawaii even though we’re better off measurably," said Brewbaker, principal of TZ Economics. "The perception is that things aren’t that good."

But Ho and First Hawaiian Bank President and CEO Bob Harrison say they haven’t changed their lending standards during the economic slowdown, and Deer disputes a widely held perception that banks are reluctant to lend.

"Loan growth is a challenge across the industry, not because the banks are unwilling to lend, as the pundits like to suggest, but rather because loan demand is so weak," Deer said. "Both businesses and consumers continue to de-leverage (pay down debt on) their balance sheets, and with so much uncertainty in the global economy, there’s not much confidence to invest in new equipment or to buy that new car or house. Still, things are improving — slowly — and the banks are eager to lend to good borrowers, so as the economy accelerates I expect loan growth to pick up."

Until then, deposits continue to grow at Hawaii banks as wary customers keep their money in short-term liquid investments.

Harrison said First Hawaiian, the state’s largest bank, has "quite a bit of money" to lend, and he’s pleased with the bank’s 2 percent loan growth in the current economic environment. He said the outlook is getting better with the improvement in tourism and some developments getting close to beginning construction. However, he said stricter federal documentation requirements have made it more difficult to underwrite residential loans.

A ramping up of the rail transit project could breathe life into the weak construction industry and, in turn, boost lending at Hawaii banks, said Leroy Laney, an economic adviser to First Hawaiian and a professor of economics at Hawaii Pacific University.

"I don’t think there’s any doubt that something like that would be a shot in the arm for the construction industry," Laney said. "The neighbor island construction industry is really in the doldrums. There’s not much activity going on there. Most of the construction you see is on Oahu."