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Hawaii's Most Profitable Companies 2012

First Hawaiian Bank is Hawaii's most profitable company and Bank of Hawaii is No. 2, both for the second year in a row

(page 3 of 6)

Interest Rates

If you recently bought a home or refinanced your mortgage, you’ve benefited from historically low interest rates. But many financial institutions have been hurt by low rates.

The rates that banks can charge borrowers are closely tied to the federal funds rate, so a low rate squeezes profits. The net-interest margins of Hawaii’s banks – the difference between the rate banks charge borrowers and the interest they pay depositors – is a critical measure of profitability, and it’s been steadily shrinking as interest rates fall.

With interest rates so low, banks have to be strategic to maintain profits. “As the Fed keeps ratcheting down rates, the net-interest margin keeps getting compressed,” says First Hawaiian Bank CEO Bob Harrison. “We’ve been able to make that up by growing the balance sheet – making more loans, having more deposits. So, while the margins have gone down, our returns have stayed the same.”

The effects of net-margin compression are even more pronounced for small, community banks, says Robert Nobriga, CFO of Hawaii National Bank. “Unlike some larger banks, we don’t have much fee-based income, like wealth management or credit-card processing, that can buttress some of that loss.” At the same time, he points out, there’s a floor to how far banks can cut expenses without affecting basic operations. As a privately held bank, Nobriga says, Hawaii National Bank has made the strategic decision to sacrifice short-term profits so that it can continue to invest in technology and hold on to staff.

Nobriga also points out that not all financial institutions are affected by low rates the same way. For example, banks that make a lot of commercial loans are considered “asset-sensitive.” That’s because these loans are usually short term and adjust more quickly to rate changes than the interest paid to depositors. In contrast, “liability-sensitive” financial institutions – including banks that hold a lot of long-term home mortgages – are able to lower the interest they pay depositors more quickly than clients can refinance their homes. “That’s why savings-and-loan-type banks, like Territorial Savings Bank and American Savings Bank, have maintained their margins a little better,” Nobriga says.

Credit unions have also scrambled to adjust to low interest rates. Aloha Pacific FCU, one of the few financial institutions in town that boosted its profit last year, increased its loan portfolio 16 percent in 2011, while simultaneously shrinking its investment portfolio by 22.7 percent. Most of this increase was in relatively high-interest home loans. In fact, Aloha Pacific opened a branch office in Las Vegas, largely to take advantage of the higher mortgage rates it’s able to charge there. In addition, the credit union has lowered the interest rates it pays member depositors. As a consequence, Aloha Pacific managed to raise its net-interest margin each of the past three years.

Low rates don’t just affect the profits of financial institutions. Organizations that depend on fixed-income investments have also felt the bite. For example, as of June 30, 2011, Kamehameha Schools had nearly $300 million parked in fixed-income investments, earning just 2.1 percent. Most conservative investors, such as trusts, nonprofits and pension funds, were forced to accept these anemic returns to hedge against uncertain times.

Average Yield on 10-Year Treasuries


Net-Interest Ratios Decline for Hawaii Banks

This ratio of net-interest income compared with assets shows declining margins over the past five years.

Institution 2007 2008 2009 2010 2011
American Savings Bank       4.23 4.12
Hawaii National Bank 6.05 5.41 4.68 4.14 4.10
First Hawaiian Bank 4.51 4.61 4.38 4.01 3.75
Bank of Hawaii 4.18 4.41 3.80 3.50 3.25
Central Pacific Bank 4.47 4.08 3.65 2.99 3.18
Finance Factors 3.09 3.22 2.98 2.83 2.98


Net-Interest Income


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