Banks expected to have plenty of money to loan

By Frank Cho
Advertiser Staff Writer

The outlook for Hawai'i's banking industry next year is bright, bolstered by low interest rates, continuing strong deposit growth and aggressive competition among financial institutions for commercial and consumer business.

Central Pacific Bank estimates that its earnings per share will rise about 8 percent next year, and said it will spend $5 million to $8 million over the next five years to expand from 24 to 34 branch locations. Advertiser library photo

Still, the state economy is projected to grow modestly at roughly 2 percent next year, according to a number of economy watchers. And that bodes well for bankers who are trying to find creative ways to loan hundreds of millions of dollars in new deposits that have been flowing in from investors seeking a safe haven from a volatile stock market.

"The banking market in Hawai'i over the next year should be one of the better ones in the country," said Jim Bradshaw, a senior banking analyst at investment firm D.A. Davidson & Co. in Portland, Ore.

Bradshaw said the banks have cleaned up their balance sheets and will have plenty of cash to increase their commercial and consumer lending businesses next year. But low interest rates and strong competition will also keep fees in check next year and likely reduce overall costs for consumers.

For much of the 1990s, Hawai'i banks struggled to remake themselves as they waded through a sluggish state economy, a Mainland recession and the 1997 Asian financial crisis. Many embarked on efficiency programs to pare costs while revenue fell or remained stagnant.

But times have changed and many are now boosting the revenue side of the business by spending money on new technology, staff and bank branches.

"We are certainly very positive right now. It is going to be a very good year for consumers, but I think it will be a good year for the banks, too," said Clint Arnoldus, president, chairman and chief executive of Central Pacific Bank.

Central Pacific Bank is projecting its earnings per share will increase about 8 percent in 2003, and said it will spend $5 million to $8 million over the next five years to expand its branch network from 24 to 34 locations. The plan calls for the first two additional branches to be added in 2003, and then two branches added each following year.

Bank of Hawai'i already has launched a branch renovation program and is spending more than $30 million to upgrade its main computer system. And American Savings Bank has increased its work force by nearly 14 percent over the last two years as it has built its own commercial lending business almost from scratch.

But it is the hot local real estate market — which is creating a record number of new home mortgages at many banks — that is expected to be a real engine for growth at banks next year.

Refinancing applications, which once accounted for 75 percent of mortgage applications at American Savings Bank, peaked in September and now represent just 37 percent as new-home sales have risen.

"One of the things that will impact us and the rest of our industry in the mortgage business is that the refinancing activity really has caused our (interest rate) spreads to contract," said Constance Lau, president and chief executive of American Savings Bank.

This will mean that American Savings, along with most other banks, will probably not earn as much next year because the spread between mortgage interest rates and deposit rates will be much smaller than they were in 2002.

But all of the banks are confident there is room to grow their businesses in other areas.

"The largest challenge we have for the coming year is being able to increase our lending to the market as deposits have grown pretty well over the last year," said David Thomas, vice chairman for retail banking at Bank of Hawaii.

The bank is forecasting it will earn about $130 million next year, up about 8.3 percent from the projected $120 million it is planning to earn in 2002.

First Hawaiian Bank vice chairman Don Horner said interest rates are expected to be relatively low next year, which bodes well for borrowers and consumer goods.

"I would expect next year would not be the boom we had in 2002, but 2003 will certainly be respectable," Horner said.

Deposits at Hawai'i-based financial institutions have grown nearly a billion dollars over the past year, as many skittish investors sought safety in bank's FDIC-insured accounts. But loans, while they grown, have not kept pace because of the state's slow economy.

Several experts agreed, however, that commercial loan demand will likely pick up in 2003 as the economy slowly improves. Still, many bankers remain cautious because they say no one really knows how strong or how long this projected economic recovery will last.

"Hotel traffic is expected to be lot weaker than originally forecast and until the employment figures on a national basis improves one would expect that visitor numbers will remain soft," said David Tadani, treasurer for American Savings. "But if there is a war in Iraq next year, then all bets are off."

Reach Frank Cho at 525-8088, or at fcho@honoluluadvertiser.com.