Bank chiefs trade barbs as competition heats up

By John Duchemin
Advertiser Staff Writer

Prompted by Central Pacific Bank's attempted hostile takeover of rival City Bank, top Hawai'i banking executives yesterday engaged in a war of words that shows just how intense competition has become among local banks.

O'NEILL

DODS

ARNOLDUS

"First Hawaiian is now owned by a French parent, and that's not the most popular foreign ownership to have right now, to say the least," Arnoldus said in a conference call with investors and analysts. "Bank of Hawaii has taken the strategy of loading the senior management with Mainland imports, and in the process has actually alienated the market."

Arnoldus' comments drew sharp responses from the top executives of First Hawaiian and Bank of Hawaii. Michael O'Neill, chairman of Bank of Hawaii, said Arnoldus' statements about Bank of Hawaii were untrue and recalled the leader of a small country in "The Mouse That Roared," a satire about that country declaring war on the United States.

"It's kind of sad to see a malihini who's been in town for a year taking cheap shots," said Walter A. Dods Jr., chairman and chief executive officer of First Hawaiian. "I was born and raised here; I didn't just get off the boat from California and learn the shaka sign."

The uncommon exchange was a vivid indication of the high stakes in the heightened competition for local customers among Hawai'i banks.

"Business doesn't ever get any easier," O'Neill said. "We're always trying to do things better, analyze the competition and tailor the products and services to address them."

Competition is nothing new, but a series of major changes have lately created an edgier environment.

"It's tough; they're slugging it out every day over there," said Joe Morford, a San Francisco-based stock research analyst with RBC Capital Markets, who covers several Hawai'i bank stocks. "There's always been a fairly intense rivalry between First Hawaiian and Bank of Hawaii, and now the smaller community banks have definitely made inroads."

Restructurings during the economically soft 1990s have made Hawai'i banks leaner and hungrier. Each of the five top banking companies — First Hawaiian Bank, Bank of Hawaii, American Savings Bank, Central Pacific Bank and City Bank — underwent a significant overhaul, taking steps including closing unprofitable branches, cutting thousands of workers and bringing in new management.

Also, a good banker's economy — low interest rates and a booming real estate market — has led to higher profits for most banks. That income boost, combined with lower costs because of the restructurings, means many banks have more money to spend on advertising, hiring new employees, and offering discounts to potential customers.

For instance, American Savings Bank and Central Pacific have each expanded their business banking staffs, attempting to wrest commercial loans and other business accounts from Bank of Hawaii and First Hawaiian. And all have beefed up their residential mortgage arms, as home loans have boomed since late 2001.

"Banks have evolved into offering a full range of products, and they are competing with a new range of other financial providers; that has really increased the level of competition," said Nathan Hokama, spokesman for American Savings Bank.

New executives, meanwhile, have brought aggressive new strategies. At Bank of Hawaii, O'Neill has sold off most of his bank's far-flung assets, transforming the company from a trans-Pacific financier to a smaller institution focused on Hawai'i.

As Bank of Hawaii has invested more of its assets in the local market, O'Neill said it has inspired other banks to fight back to protect their market share. He said that has been good for bank customers, who have probably enjoyed lower rates as a result.

"Obviously, when you get a competitive landscape, the consumer benefits," said O'Neill, Bank of Hawaii's leader since 2000.

Central Pacific's Arnoldus, who arrived last year, has also brought a more aggressive edge to his bank. Aside from starring in his bank's TV commercials — emulating Bank of Hawaii's strategy to make O'Neill its spokesman in ads — Arnoldus has tried to shed Central Pacific's image as an ethnically rooted niche bank, founded by Japanese Americans for Japanese Americans, and give the bank a broader appeal.

Arnoldus characterizes the attempted hostile takeover of City Bank as a natural move to create a stronger competitor to other large banks. By itself, Central Pacific is a $2 billion bank, fourth in the state, with a market share less than 10 percent. If it buys City Bank, Central Pacific would have almost $4 billion in assets and a 15 percent market share.

Bank analyst Morford said it's normal for a small but growing community bank like Central Pacific to flex its muscles after a period of growth.

"That's the food chain in the industry," Morford said. "As big banks get bigger, they create opportunities for community banks to move up, by getting the crumbs from the larger banks. I think the Central Pacific-City Bank combination would be a much more formidable competitor versus the big banks."

This competitive environment was the background for Arnoldus' comments about Bank of Hawaii and First Hawaiian. He said a larger Central Pacific would be a natural draw for kama'aina customers because the larger banks are less local.

"They've sent the message that Mainland people are the ones who should be running this institution, not the people of Hawai'i," Arnoldus said of Bank of Hawaii. "And that hasn't been received very well."

O'Neill said his bank's quarterly surveys show customer satisfaction has improved.

"If that's failure, then failure feels pretty good," he said.

First Hawaiian's Dods said Arnoldus fails to realize that "local" has little do do with a bank's ownership. First Hawaiian Bank is owned by French multinational bank Banque Nationale de Paris but remains a strongly Hawaiian institution, Dods said.

"If he really understood what 'local' means, he'd know local people don't make hostile attacks on honorable competitors," Dods said. "Anytime he wants to debate in pidgin on 'local,' I'm available."

Arnoldus later backed away from his comments about First Hawaiian.

"It's unfortunate Walter Dods took my comment so personally," he said. "I certainly did not mean to say that the employees of First Hawaiian Bank are French and not local. We have high regard for their employees."

• • •