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First Hawaiian eyes eventual moves to return more capital to investors


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First Hawaiian eyes eventual moves to return more capital to investors

When First Hawaiian Inc. went public last year, it set in motion a multistep process for its French parent, BNP Paribas SA, to reduce its ownership of the Honolulu-based bank, to put it on a path toward local autonomy and, potentially, heightened capital returns to investors.

While the ultimate timing of BNP's further exit moves depends on decisions at that company's corporate offices in Paris, top First Hawaiian executives, speaking at a Goldman Sachs conference in New York on Dec. 6, said they are examining ways in which their company can step up capital returns beyond an already healthy dividend payout ratio of more than 50%.

First Hawaiian is "looking at various options," Chairman and CEO Robert Harrison said, notably including share buybacks and, perhaps, a special dividend. He said feedback from investors points to those two possibilities as the most favored. "We really view ourselves as a steady capital return story," he added.

First Hawaiian completed its IPO in August of last year. After the IPO and an additional stock sale early this year, BNP still holds a stake in First Hawaiian that tops 60%.

Analyst Jared Shaw of Wells Fargo Securities said in an interview that, ultimately, new capital-return moves must await regulators' and auditors' subjective determination that BNP's ownership level has dropped low enough that First Hawaiian would no longer qualify as a notable source of financial strength for the French company. Shaw estimated that level at around 20% to 25%.

When that happens, Shaw thinks First Hawaiian's financial strength will support the return of more capital.

Of note, Shaw said, the Honolulu bank will see its costs rise some when BNP meets the lower ownership threshold, as BNP will no longer have to reimburse First Hawaiian for certain expenses linked to supporting the parent company, such as managers' work to help BNP comply with U.S. regulators' requirements for annual big-bank capital plans.

But Shaw noted that First Hawaiian's strong profitability should enable it to continue to produce earnings-generated capital and provide it the ability to buy back shares or issue a special dividend. From his conversations with First Hawaiian executives, he said: "I think they feel there is and will be excess capital."

For the third quarter, for example, First Hawaiian reported a common equity Tier 1 capital to risk-weighted assets ratio of 12.71%, nearly double the 6.5% that it needs to remain above for regulators to consider it well-capitalized.

Earnings for the third quarter were strong as well, and executives say the bank's home-base Hawaiian economy remains strong and stable.

First Hawaiian, which has more than $20 billion in assets and is the largest bank based in the islands state, posted third-quarter net income of $58.4 million, or 42 cents per share, up from $53.2 million, or 38 cents per share, a year earlier.

Total loans and leases of $12.1 billion were up 6.6% from the third quarter of 2016. Net interest income of $133.3 million was up by $10.6 million.

Hawaii's tourism-driven economy has and continues to grow and generate loan demand, executives said, and a strong labor market shows no signs of weakening. The state jobless rate has consistently hovered below 3%.

According to a report last week from the Hawaii Tourism Authority, through the first 10 months of 2017, the number of visitors to the islands climbed 4.7% from the same period a year earlier. Visitor spending climbed 6.8%.

Bank of Hawaii Corp., the second-largest bank in the state, reported similarly strong third-quarter results, and its chief executive, too, remains upbeat on the operating environment.

Bank of Hawaii reported third-quarter net income of $45.9 million, or $1.08 per share, up from $43.5 million, or $1.02, a year earlier. That bank, also based on Honolulu, said loans and leases totaled nearly $9.6 billion at the close of the third quarter, up $879.9 million from a year earlier. Net interest income increased $12.3 million to $119.2 million.

"Conditions here remain strong," Bank of Hawaii Chairman, President and CEO Peter Ho said in an interview following the latest earnings report. "I don't see threats to that."