Hawaii's Downturn Looks like a Day at the Beach, Thanks to Credit Quality
Zuckerman, Sam, American Banker
Hawaiian banks are in a slump, but you would hardly know it.
The banks are feeling the effects of a prolonged economic downturn in the Aloha State. Yet Hawaiian banks have managed to avoid the crises that gripped their mainland cousins during recent periods of recession.
In these islands of waving palms and and gentle trade winds, there are no back-breaking burdens of bad loans, no tides of red ink, no capital melt-downs, and no crews of stern bank examiners issuing ultimatums.
As the Hawaiian economy stalls, the main impact on banks has been a slackening of their once torrid growth rates.
Clean Balance Sheets
Although loan problems have edged up, bank balance sheets are still clean by mainland standards. In fact, the credit quality of Hawaiian banks in the trough of a recession compares favorably with that of their U.S. peers in good times.
"There certainly has been a slowdown," said H. Howard Stephenson, chairman and chief executive of Bancorp Hawaii. "But we haven't had to press the panic button."
With an economic upturn in Hawaii a couple of years off, according to forecasters, more sluggishness is in store.
"Hawaiian banks will continue to perform well compared to other banks in the U.S.," said Stephen J. Paluszek, an analyst with M.A. Schapiro, New York. "They just won't do as well as they have done."
Winning Streaks Interrupted
Stagnation is a big comedown for the state's financial institutions. After years of uninterrupted growth, Hawaii's two biggest banking companies, Bancorp Hawaii and First Hawaiian Inc., broke long-standing streaks of quarterly earnings gains in 1993.
Last Thursday, Bancorp Hawaii reported third-quarter earnings of $30.1 million, 4.9% below the year-earlier net. The dip was due to a special addition to loan-loss reserves to cover a group of credits to a single commercial borrower.
The end of the boom years "has been a shock to the system," noted David McClain, a finance professor at the University, of Hawaii. Bank managers admit they are groping to adjust to leaner times.
"We were spoiled," confessed Mr. Stephenson. Said First Hawaiian president John A. Hoag: "We have had to regroup."
Return to Basics
Hawaiian bankers say they are going back to basics. Competition for consumer business has turned fiercer. That partly reflects the arrival of the first out-of-state competitor, BankAmerica Corp., which bought a local thrift last year.
BankAmerica hasn't made its weight felt much so far, local bankers say. But its mere presence has shaken up the market.
"All the banks are out with aggressive marketing campaigns," said Mr. Hoag. "And there is a much greater emphasis on sales and training."
Bancorp Hawaii and First Hawaiian have both launched major expansion campaigns, buying smaller banks and thrifts on the islands.
Hawaii is one of the last states to bar interstate banking. BankAmerica got in by acquiring a thrift. Local bankers believe the walls will come down.
"We need size and muscle," Mr. Hoag stressed. "We had to grow in-market in order to sustain the onslaught from the mainland."
Otherwise, Hawaii's two big banks are following markedly different strategies.
While First Hawaiian has focused on expanding market share in its home base, Bancorp Hawaii has built up beachheads in the Pacific islands and East Asia. It even owns a small bank in Arizona. Within five years, it would like to get 45% of its profits from these non-Hawaiian operations, Mr. Stephenson said.
Where the Action Was
Hawaii's boom of the 1980s reflected its strategic location in the middle of the Pacific Ocean. Growth on the islands was spurred by robust business activity on both sides of the Pacific Rim.
Capital from California, East Asia, and especially Japan financed resort construction and real estate development from the big island of Hawaii to Kauai 600 miles away. …