Bank of Hawaii (BOH) Q4 2023: Deposit Base Rises 1.8% YoY as Margin Expansion Signals Rate Resilience
Bank of Hawaii’s Q4 results highlight deposit stability, disciplined expense control, and a strategic tilt toward asset repricing in a shifting rate environment. Management’s commentary and Q&A reinforce the franchise’s unique deposit strength and hedging strategy, while credit quality and capital remain robust. Guidance signals margin upside and muted loan growth, positioning BOH for steady navigation through macro uncertainty.
Summary
- Deposit Franchise Durability: Long-tenured, relationship-driven deposits underpin funding advantage and rate discipline.
- Margin Leverage from Asset Repricing: Shift to floating-rate assets and swaps supports NIM expansion even as rates fluctuate.
- Muted Loan Growth Outlook: Management projects slow loan origination, with commercial activity on pause pending rate clarity.
Business Overview
Bank of Hawaii is a regional bank serving Hawaii and the West Pacific, generating revenue primarily through net interest income from lending and deposit activities, complemented by fee-based services. Its business is split between consumer (59%) and commercial (41%) lending, with a heavy emphasis on real estate-secured loans and a deposit base characterized by exceptional tenure and stability.
Performance Analysis
Deposit growth remains the standout narrative, with average balances up for a second straight quarter and a 1.8% year-over-year increase, outpacing national peers. This performance is particularly notable given BOH’s avoidance of brokered deposits, and the fact that 75% of its deposits have a tenure of at least 10 years. Non-interest-bearing deposits, a low-cost funding source, stabilized after prior declines, supporting cost of funds discipline.
Net interest margin (NIM) held steady, buoyed by asset repricing and a strategic increase in floating-rate exposure—now at 45% versus 27% a year ago. While net interest income declined sequentially, management’s hedging program and reinvestment of runoff into higher-yielding loans (averaging above 7.5%) are expected to drive margin expansion in the coming quarters. Expenses were well managed, with core operating costs flat sequentially after adjusting for non-recurring items and the FDIC special assessment.
- Deposit Beta Plateau: Cumulative deposit beta peaked at 31.6%, with rates flattening and non-interest-bearing balances stable.
- Credit Quality Outperformance: Net charge-offs and non-performing assets remain low, with criticized loans declining and strong real estate collateralization.
- Capital and Liquidity Strength: Capital ratios improved, with risk-weighted assets well below peers, reflecting conservative risk management.
Despite a flat loan book and tepid origination outlook, BOH’s asset mix and funding cost control position it well for ongoing NIM improvement. Non-interest income was steady, and expense discipline is set to continue, though 2024 will see a modest inflation-driven increase.
Executive Commentary
"We consider our deposit base to be the crown jewel of the franchise, built slowly over 125 years of our history in the islands, one relationship at a time... Despite the volatility created by the regional bank crisis in the first quarter of 2023, both average and spot balances have been steady and growing throughout the year."
Peter Ho, CEO
"To better balance our interest rate sensitivity profile, in the fourth quarter, we added an additional $1 billion of notional pay-fixed received float interest rate swaps, or a total of $3 billion notional... These actions have increased our floating rate assets exposure to 45% from 27% at the end of 2022 and positioned us well for this uncertain rate environment."
Dean Shigemura, CFO
Strategic Positioning
1. Relationship-Driven Deposit Base
BOH’s core funding advantage rests on its uniquely stable, long-tenured deposit base, with more than half of deposits held for over 20 years. This provides resilience against industry-wide deposit migration and supports lower funding costs versus peers.
2. Asset Mix and Hedging Flexibility
The bank’s deliberate pivot toward floating and adjustable-rate loans, combined with a $3 billion interest rate swap program, enables dynamic asset repricing as rates move. This positions BOH to benefit from both stable and declining rate environments, with management expecting NIM expansion even if the Fed begins to cut rates modestly.
3. Conservative Credit and Real Estate Exposure
Disciplined portfolio management—focused on long-standing relationships and real estate-backed lending—has kept credit losses minimal and non-performing assets low. The commercial real estate portfolio is granular, conservatively underwritten, and benefits from Hawaii’s supply-constrained market, which dampens volatility and repricing risk.
4. Expense and Capital Management Discipline
Despite inflation, core expenses remained flat sequentially after adjusting for one-time items, and management projects only a modest 2%–2.5% increase in 2024. Capital ratios remain strong, with organic capital growth and no share repurchases in the quarter, supporting dividend continuity.
5. Cautious Growth and Market Sensitivity
Management expects loan growth to remain subdued as both consumers and commercial clients pause amid rate uncertainty. The bank is positioned to capitalize on a recovery in tourism and potential Maui rebuilding, but these are not near-term drivers.
Key Considerations
This quarter’s results reinforce BOH’s defensive posture and highlight the levers it can pull in a volatile macro environment. Investors should weigh the following:
- Deposit Stability as a Strategic Moat: The relationship-driven deposit base provides a cost and retention advantage that is rare among regionals.
- Margin Upside from Asset Repricing: The shift to floating-rate assets and swaps offers flexibility, with management guiding to NIM expansion even as the rate cycle turns.
- Expense Control Amid Inflation: Core operating expenses are tightly managed, with only inflationary increases expected in 2024.
- Loan Growth Headwinds: Economic and rate uncertainty are likely to keep origination muted until the latter part of the year.
- Tourism and Maui Rebuild as Potential Catalysts: Recovery in Japanese tourism and eventual Maui reconstruction could provide upside, but the timing remains uncertain.
Risks
Key risks include prolonged economic sluggishness, delayed rate normalization, and potential deposit outflows if market competition intensifies. While Hawaii’s real estate and deposit markets are structurally unique, a sharp downturn in tourism or unexpected credit deterioration could pressure results. The timing of Maui’s rebuild and lingering effects from the wildfires also add uncertainty to the growth outlook.
Forward Outlook
For Q1 2024, BOH guided to:
- Net interest margin expansion of 2–4 basis points, driven by asset repricing and stable funding costs.
- Core non-interest income to remain at Q4 levels in the first half, with a trend higher in the second half.
For full-year 2024, management projects:
- Core expense growth of 2%–2.5% over 2023 normalized levels.
Management emphasized continued deposit stability, a cautious stance on loan growth, and the expectation that higher-yielding asset reinvestment will support margin and earnings. Seasonal payroll and benefits expenses will impact Q1, but are not expected to alter the full-year cost trajectory.
- Margin expansion remains a focus, even as rate cuts emerge.
- Loan growth will be slow until macro clarity improves.
Takeaways
BOH’s Q4 results showcase the value of a stable deposit franchise and disciplined risk management in a period of macro uncertainty.
- Deposit Stability Drives Funding Advantage: Long-tenured, relationship-based deposits provide resilience and low cost, underpinning BOH’s ability to outperform peers in a turbulent environment.
- Hedging and Asset Mix Enable Margin Flexibility: The bank’s pivot to floating-rate assets and swaps positions it to capture margin upside, with management guiding to continued expansion even if rates decline.
- Growth Hinges on Macro Clarity: Muted loan origination and uncertainty around the Maui rebuild suggest that meaningful growth will depend on broader economic and market developments later in 2024.
Conclusion
Bank of Hawaii’s quarter affirms its core strengths: a durable deposit base, robust credit quality, and disciplined financial management. With asset repricing and hedging strategies in place, the bank is positioned to defend and grow margins as the rate environment evolves. Near-term growth may be limited, but BOH’s unique market position and prudent approach offer stability and optionality for investors.
Industry Read-Through
BOH’s results and commentary reinforce the strategic value of stable, relationship-driven deposit franchises in the regional banking sector, especially as funding costs rise and competition for deposits intensifies. The success of its hedging and asset repricing approach provides a template for margin defense in a shifting rate environment. For peers, the quarter underscores the importance of disciplined expense control and conservative credit management, while highlighting the challenges of achieving loan growth amid macro and rate uncertainty. The Hawaii market’s unique dynamics may not be fully replicable, but the principles of funding stability and risk discipline are broadly instructive as the industry navigates the next phase of the economic cycle.