Posted on: Sunday, April 20, 2003
Amid hard times, banks prospered
| • | Chart: Bank players at a glance |
By John Duchemin
Advertiser Staff Writer
Central Pacific Bank's dramatic hostile takeover bid of local rival City Bank may have surprised shareholders, analysts and customers. But it isn't occurring in a vacuum.
Banking in Hawai'i has boomed for several years despite the economic shocks of the Sept. 11, 2001 terrorist attacks and the Iraq war. Buoyed by low interest rates and an improving real-estate market, four of the five largest Hawai'i banks saw earnings increase last year.
The overall success helped set the stage for the takeover attempt. Steadily rising earnings at Central Pacific have not only added tens of millions of dollars to the bank's coffers, but also pushed up the stock price.
That means Central Pacific has the cash reserves and stock market clout to offer City Bank a $285 million combination of shares and dollars — and still keep a majority share of the combined company.
Bankers, economists and analysts said the Central Pacific move reflects an overall prosperity in the banking industry, which has helped stimulate the Hawai'i economy despite sour times for tourism.
"Banks can certainly make money in this kind of environment," said Paul Brewbaker, chief economist for Bank of Hawaii. "There are plenty of opportunities to take advantage of."
Among the five largest banks, four have seen net income grow at a 10-percent-or-more annual clip for the past five years. Only Bank of Hawaii earned less money in 2002 than in 2001, but that's partly because the bank is smaller overall, having sold off more than 30 percent of its assets in an attempt to improve profitability.
At First Hawaiian Bank, earnings have risen from $77 million in 1997 to $125 million last year. Central Pacific's earnings increased from $15 million to $33 million over that period, with profits rising each year. American Savings' earnings rose 18.5 percent on average over the past five years; City Bank's profits, while starting from a much smaller sum, increased 38.5 percent on average.
Meanwhile, assets, loans and deposits have recently risen at above-inflation rates at all the major local banks, except for Bank of Hawaii.
Behind the increases are factors including a favorable local real-estate market and a nationwide decline in interest rates that has helped banks everywhere. Joe Morford, a banking analyst with RBC Capital Markets, said Hawai'i banks' experience is similar to those in other markets.
"The main reason banks have been doing so well is really a function of the national economy and national interest rates," said Constance Lau, president and chief executive officer of American Savings Bank. "Particularly after 9/11, the government used the banking system to shore up the economy. To a large extent, that's why we're benefiting."
Since early 2001, sensing economic weakness, the Federal Reserve has repeatedly cut the interest rate used to determine short-term loans, which has let banks offer lower rates for such items as credit cards, small business loans and car loans.
Meanwhile, a declining stock market since mid-2000 has caused investors to flee to safer investments like long-term bonds, which are used to set the interest rate for mortgages and other long-term loans. With more demand for bonds, interest rates on those bonds have dropped; therefore, mortgage rates have also dropped, hitting nationwide, 41-year lows earlier this year.
Those lower rates have meant a boom in mortgage business at banks, as customers refinance home loans. Each refinancing brings in fee income to banks, often several thousand dollars.
"In the process of refinancing, financial institutions have earned a whole bunch of money," Brewbaker said. "Low interest rates have been the icing on the cake."
In Hawai'i, the lower rates have coincided with a rebound in the real-estate market, which had been depressed through most of the 1990s after the early '90s Japanese investment bubble burst. This has stimulated demand for new mortgages, Lau said.
Improved land values has also helped credit quality as homeowners see their wealth increase, giving them more equity with which to combat debt, Lau said. As a result, the number of bad loans has steadily dropped, also helping banks' income. With loan delinquencies down, banks don't have to set aside as much income to cover the bad debts.
The sum of all these favorable factors is a banking sector that has done surprisingly well in the face of a shock to tourism that has bankrupted several major companies and cost more than 11,000 tourism workers their jobs in late 2001.
"We had prepared for our business to weaken after 9/11, but business has proven quite resilient," Lau said.
This environment has clearly helped Central Pacific, which aspires to become a strong fourth rival to the top three banks. Central Pacific Chairman Clint Arnoldus envisions a combined bank with more than $3 billion in deposits and better equipped to grab market share from its larger competitors.
His bank flush with earnings, Arnoldus said Wednesday he sees the takeover as "the right fit at the right time." Without the industry's upswing, however, Arnoldus would likely have had a much harder time finding the money to consummate the deal.
Reach John Duchemin at jduchemin@honoluluadvertiser.com or at 525-8062.
