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Bank Shots

Publicly traded banks here are scoring big in a highly competitive game

It was an event rich in David-takes-on-Goliath symbolism. Last November, just four days after First Hawaiian Bank’s 31st Annual Business Outlook Forum held at the Hawaii Convention Center, Central Pacific Bank held its first economic forecast gathering at the Pacific Club in downtown Honolulu.

In addition to economic projections, the presentation included CPB’s impressive statistics (at the time, ROE 19.85 percent, ROA 1.66 percent and core earnings per share of $1.90) as well as an appearance by Alex, the collie that stars in the bank’s television and print advertisements.

Clinton Arnoldus: Chairman, President and Chief Executive Officer, CPB Inc. Photo: Jimmy Forrest

Clinton Arnoldus, chairman, president and chief executive officer for CPB Inc., highlighted a string of the bank’s recent rankings: No. 4 by U.S. Banker; No. 25 by ABA Banking Journal; and No. 959 among the world’s top 2,000 banks, according to The Banker.

Then Arnoldus sounded the public charge: Central Pacific Bank’s goal is to capture a greater local market share. It will accomplish that by focusing on small business and commercial real estate, expanding trust and asset management, private banking and wealth management.

It was a declaration in a highly competitive market marked by strong performances by its local, publicly traded banks: CPB Inc. (NYSE:CPF), the holding company of Central Pacific Bank; Bank of Hawaii Corp. (NYSE:BOH) and CB Bancshares Inc. (Nasdaq: CBBI), the holding company of City Bank.

Hawaii Bank Stock Performance 2002
Source: (December 31, 2002)

Local stock analyst Randy Havre says, “If you’re just going to be in Hawaii, the only growth you’re going to be able to get is through regular economic growth, inflation or stealing customers from someone else.”

Some of the banks’ stocks have also had the aid of aggressive buyback programs and the muscle of getting listed on key indexes, such as the Russell 1000 Growth Index. Joe Morford, an analyst with RBC Capital Markets, is pleasantly surprised at how well Hawaii and other Western regional banks have been performing. “I think the performance to date has been surprisingly strong, given the challenging operating environment,” Morford says.

For Central Pacific Bank, Arnoldus has set 2003 goals: growing both the deposit base and earnings-per-share by 8 percent to 10 percent. He spends three days a week in the field, signing up new businesses and overseeing accounts with an expanded sales force. He says that he earns more money for the bank by being out in the market and not sitting in his office.

“We’re all trying to position ourselves in a market that’s got 2 percent to 3 percent growth, so it’s pretty competitive as you can appreciate,” Arnoldus says. “I think [each bank has its] own strategy that they are executing. We’re going to be a friendly competitor at this point and compete to win.”

Michael O’Neill: Chairman, Chief Executive Officer and President, Bank of Hawaii Corp. Photos: Jimmy Forrest

“Friendly” is not exactly how the other guys characterize the competitive environment. At Bank of Hawaii, which also had a very good year, Michael O’Neill, chairman, CEO and president, says his primary competitor is First Hawaiian Bank (whose parent, BancWest Corp., became a privately held company at the end of 2001) because of size. Bank of Hawaii Corp. listed total assets of $9.7 billion as of September 2002, which dwarfs CPB Inc.’s total assets of $1.98 billion and CB Bancshares Inc.’s total assets of $1.59 billion.

“The other two guys are a lot smaller. Their objective appears to be to grow their franchises by poaching employees from First Hawaiian and Bank of Hawaii,” O’Neill says. “I’m not afraid of competition. We’re not going to sit idly by and watch these little guys peck away at us.”

O’Neill has succeeded in divesting the bank of underperforming businesses and will complete outsourcing some of the bank’s data-processing operations to Metavante this year for an anticipated annual cost savings of more than $17 million. His often-repeated focus on shareholder value is evident. As of December, O’Neill owned 740,000 shares of the bank’s stock and had waived his 2002 salary. He also has options on 2.5 million shares.

“I get no perks. I have no golden parachute. I’ve got no car. I’ve got nothing other than the options, so it’s all stock-related,” O’Neill says.

Wall Street approves. For the week of Nov. 19, 2002, Bank of Hawaii topped the Lehman Brothers Bank Index of 56 banks for year-to-date stock performance and was Bloomberg Banking Index’s No. 1 bank for year-to-date total shareholder returns.

O’Neill says, “We kind of dug ourselves out of a hole here and focused very much on customer service. We are beginning to see some progress.” The bank retained financial consulting firm Cohen Brown for more than $1 million to provide training in the areas of sales and service. Bank of Hawaii has focused back on the Hawaii market, by selling more products and services to its long list of Hawaii customers.

Morford says it remains to be seen how successful the latter will be in increasing wallet share. “They’ve had some bumps along the road locally in the past couple of years, whether it’s the New Era program and some of the layoff announcements and the sale of the VISA card (portfolio) to American Express, things like that. There is definitely opportunity, and I think it’s going to come down to execution. It’s too early to tell,” he says.

Richard Lim: President, City Bank Photos: Jimmy Forrest

City Bank President Richard Lim says, “It sounds like Bank of Hawaii has at least finally finished its restructuring. CPB is, I think, still in the process of restructuring, and I feel we did our restructuring. I think it is going to be a free-for-all in the next couple of years.” Lim says that five years ago City Bank transformed itself from an ethnic bank focusing on the Japanese community to a full-service community bank focusing on consumers and small businesses.

“We are now in our growth phase, and, thanks to the downsizing and restructuring of the other banks, we have been able to recruit so many experienced bankers that we’re like the ‘United Nations of Banking,’” he says.

Lim makes no bones about his strategy to steal market share from the “Big Banks.” One weapon is City Bank’s free checking for consumers and small businesses, which has seen double-digit growth in accounts over the past several years.

Bank of Hawaii Corp. (NYSE:BOH)
Founded: 1897
Assets: $9,702,043,000
ROE: 9.6 %
ROA: 1.13 %
Ratio Price/Book: 1.83
52-week high: $31.00
52-week low: $22.79
Sources: Bank of Hawaii Corp. and (December 13, 2002)
Founded: 1954
Assets: $1,979,742,000
ROE: 20.57%
ROA: 1.69%
Ratio Price/Book: 2.56
52-week high: $28.25
52-week low: $13.81
Sources: CPB Inc. and (December 13, 2002)
CB Bancshares Inc. (Nasdaq: CBBI)
Founded: 1959
Assets: $1,588,195,000
ROE: 7.67 %
ROA: 0.68 %
Ratio Price/Book: 1.05
52-week high: $41.60
52-week low: $30.45
Sources: CB Bancshares Inc. and (December 13, 2002)

Lim says there’s not much difference between the two former “Japanese” banks (Central Pacific Bank and City Bank), which have historically fought each other while the big guys (First Hawaiian Bank and Bank of Hawaii) were duking it out. Lim says, “As Don Horner [chief operating officer and president of First Hawaiian Bank] would say, ‘It boils down to execution.’ I don’t see CPB as a major threat, because look at their market share and our market share. We’re so small, and they’re so small. Why should we fight each other for our little piece of the pie? In fact, we’ve talked about this and said, ‘Let’s go after the other guys, the big banks.’”

Hawaii stock analyst Havre says, “I think the three [publicly traded] banks are lucky that we do have a small market here. It’s really not growing at all. It’s pretty stagnant. So that keeps out competition. They have nothing new to worry about. They can just deal with what they’ve always been dealing with: the others that they all know really well.”

Adds City Bank’s Lim, “There’s going to be intense competition because everyone is going after the same market. I think it boils down to pricing, convenience and style as the difference.”

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