Fitch Affirms American Savings Bank, FSB's IDR at 'BBB'; Removed from Rating Watch Negative

Fitch Ratings has affirmed American Savings Bank, FSB's (ASB) Long-Term Issuer Default Rating (IDR) at 'BBB'.

Fitch has also affirmed ASB's Short-Term IDR and Viability Rating (VR) at 'F2' and 'bbb', respectively and removed the Rating Watch Negative (RWN) that was placed on Aug. 22, 2023. The Rating Outlook is now Stable.

The ratings of Hawaiian Electric Industries (HEI) and Hawaiian Electric Company (HECO) are unaffected by this action.

ASB's ratings do not incorporate any shareholder support from HEI. The bank's standalone VR is above the parent's rating, and ASB's creditworthiness does not rely on ordinary or extraordinary support from its parent. Fitch believes ASB operates with a high degree of financial and operational independence and is not directly exposed to legal claims against HEI and HECO, which is the largest supplier of electricity in the state of Hawaii. Fitch considers ASB to have reputational risk related to its association with HEI and Hawaiian Electric Company, notwithstanding its distinct branding.

Key Rating Drivers

Ratings Affirmed; Stable Outlook: Fitch has noted stability in ASB's deposit base, earnings profile, and capital levels that is consistent with its VR of 'bbb'. The RWN removal reflects Fitch's belief that deterioration in key sensitivities are unlikely to occur within the next six months. Fitch also believes outstanding litigation will not meaningfully drive ASB's VR over the rating horizon.

Stable Deposits: ASB's deposit profile has not shown signs of deterioration following the Maui wildfires in August 2023. Average quarterly deposits declined 44 bps since 2Q23, in line with Hawaiian bank peers. Notably, ASB had the lowest increase in cost of funds over the past two quarters among the peer group. Uninsured deposits represent 19% of total deposits which is below Hawaiian bank peers and similarly-sized mainland banks; unused FHLB and Federal Reserve Bank facilities cover roughly 145% of its 4Q23 uninsured deposits. Fitch believes the low level of uninsured deposits and strong liquidity coverage reduces risk of large deposit outflows due to negative headlines about HEI and HECO.

Stable Capital Levels: ASB has consistently maintained adequate levels of capital and taken a prudent approach to capital management. The bank has paused dividends HEI since 4Q23 and expects to use the retained capital to support lending in Maui. The bank has historically demonstrated a willingness to suspend its dividend at times of stress, such as in early 2020.Fitch believes ASB will continue to manage its capital levels around its long-term averages. Common Equity Tier-1 (CET1) at 4Q23, at 12.27%, is modestly up from 2Q23 levels of 12.23%. Rising interest rates has resulted in $292 million in AOCI losses at 4Q23, resulting in 7.5% CET1 inclusive of AOCI; the losses are below 2Q23 levels of $323 million.

Margin Compression Expected: ASB's earnings have been pressured by rising deposit costs but remain in line with its current rating. Net interest margin (NIM) compression, along with normalization in provisioning, have led to a decline in operating profits throughout FY23. Fitch expects NIM and overall profitability will continue to decline over FY24 in line with 'BBB' rated banks. ASB has the lowest cost of funds among Hawaiian peers and has not shown an increase in funding costs due to reputational risk from HEI and HECO. ASB is a spread-reliant bank with limited revenue diversity, leaving the bank subject to rate-driven earnings volatility. This is expected to remain a ratings constraint over the rating horizon.

Stable Asset Quality: ASB's impaired loan ratio, at 47 bps at 4Q23, is lower than year ago levels and remain substantially below negative rating sensitivity of 3%. Following the cessation of unsecured consumer lending in 2020, net chargeoffs have decreased significantly. This is expected to retrace towards historical levels as credit conditions normalize and ASB re-enters the unsecured consumer lending.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Negative changes to ASB's customer behavior, especially in the form of increased deposit outflows, liquidity stress or increased funding costs, could lead to negative pressure on ASB's ratings.

Outside of any reputational exposure to its parent, ASB's ratings would also be sensitive to a significant deterioration in asset quality. Negative pressure could emerge if impaired loans to gross loans were to exceed 3% and be expected to remain above that threshold for an extended period. In addition, chargeoff rates in the consumer book that compare unfavorably to peers could create downward rating pressure.

The bank's ratings would be negatively influenced if its CET1 were to fall below 10% and remain there for multiple quarters, absent a credible plan to build levels back above this threshold. Fitch would also be sensitive to any changes in capital management, such as aggressive dividends to the parent, that would also result in a rapid decline in the bank's capital levels.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch believes ASB's ratings have limited upside potential within the rating time horizon of 12 months to 18 months due to the bank's spread reliant earnings profile, narrow lending franchise and business model. Longer term, positive rating momentum could result if ASB's core earnings performance and consistency were to converge with those of higher rated peers, while maintaining solid asset quality, an appropriate risk appetite and sound levels of capital. If ASB were to improve revenue diversity by growing its fee income businesses to approximately 30% of total revenue on a consistent basis, positive rating pressure could occur.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Long- and Short-Term Deposit Ratings: ASB's long-term uninsured deposits are rated one notch higher than the bank's IDR as U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. Fitch rates ASB's short-term uninsured deposits 'F2' in accordance with our Bank Rating Criteria based on the bank's long-term deposit rating and Fitch's assessment of its funding and liquidity profile.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

NEGATIVE SENSITIVITY

Long- and Short-Term Deposit Ratings: ASB's long-term deposit rating is sensitive to any negative change to the bank's Long-Term IDR. ASB's short-term deposit rating is sensitive to negative changes to the company's long-term deposit rating and Fitch's assessment of the bank's funding and liquidity profile.

POSITIVE SENSITIVITY

Long- and Short-Term Deposit Ratings: ASB's long-term deposit rating is sensitive to any positive change to the bank's Long-Term IDR. ASB's short-term deposit rating is sensitive to positive change to the company's long-term deposit rating and Fitch's assessment of the bank's funding and liquidity profile.

Ownership Change: ASB's ratings do not incorporate any shareholder support from HEI but could be negatively or positively impacted by a change in ownership.

VR ADJUSTMENTS

The VR has been assigned in line with the implied VR.

The Asset Quality score of 'bbb-' has been assigned below the implied score of 'a' due to a negative adjustment for the geographic concentration of the loan portfolio.

The Earnings and Profitability score of 'bbb' has been assigned below the implied score of 'a' due to a negative adjustment for revenue diversity.

The Capitalization and Leverage score of 'bbb' has been assigned below the implied score of 'a' due to a negative adjustment for capital flexibility.

The Funding and Liquidity score of 'a-' has been assigned below the implied score of 'aa' due to a negative adjustment for contingent access.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.