Cover Story
Bank of Hawaii's Decision to Leave
The Marshall Islands and FSM sends shock waves through the region
Chances are good that anyone who has lived in or traveled through the Western Pacific in the past 40 years has a Bank of Hawaii story. Probably two or three stories, in fact. The bank’s expansion into these islands was big news in the 1960s and 1970s. In many cases, it was the first commercial bank to open its doors in those islands since the Japanese administration in the 1940s.
I recall a visit with the Bank of Hawaii’s Yap branch manager in the mid-1970s. He was relatively new to Yap, an up-and-comer from Hawaii who marveled that his customers, dressed in the traditional Yapese thu or loincloth, would bring turtles to the Colonia branch as gifts or collateral.
- ADVERTISEMENT -
Even earlier on Saipan, the Bank of Hawaii’s sole branch at the time was a beacon, an important financial and institutional symbol of the region’s link to the outside world. In those days – when we had just two flights a week to Guam and four-digit telephone numbers – the fact that Bank of Hawaii was doing business on isolated Saipan provided reassurance about the present and considerable optimism about the future.
So it wasn’t surprising that the bank’s February announcement that it will sell its one branch in the Marshall Islands and three in the Federated States of Micronesia (one each in Kosrae, Pohnpei and Yap) by the end of June hit hard. Economically, the announcement was the equivalent of a tsunami warning for atoll dwellers: Bank of Hawaii, at the end of 2001, had combined deposits in the Marshalls and FSM of about $72.5 million, and loans of $16 million. There are 49 staffers at those four branches. The bank will remain in Guam, the Commonwealth of the Northern Marianas, and Republic of Palau, as well as in American Samoa (see chart).
 |
|
|
Despite the decision to stay in those four Pacific Islands markets, the February announcement was a stunning conclusion to a yearlong sell off that saw Bank of Hawaii shed its operations in the South Pacific, Australia, Asia and the U.S. mainland. For the national governments in Majuro and Palikir, the bank’s pullout is a body blow to investor confidence in those two countries. And, most significantly, it touched all those who over the years developed deep business and personal ties to Bank of Hawaii.
Still, anyone who over the past four years watched Bank of Hawaii go through its painful “reengineering” and post-reengineering refocus was not that surprised by Chairman and Chief Executive Officer Michael O’Neill’s decision to divest its Marshalls and FSM operations. O’Neill, who was hired in the fall of 2000 after the bank found itself overextended and badly exposed to the effects of protracted downturns in Asia and Hawaii, has had but one mantra: quickly boost shareholder value. Every move he’s made, from his widely reported purchase of about $10 million in Pacific Century Financial Corp. shares shortly after joining the bank, to the heavily criticized decision to sell the bank’s Visa credit card program to American Express, has been made to strengthen shareholder value (see stock chart).
O’Neill made that point when the decision to pull out of the Marshalls and FSM was announced: “Our business strategy remains focused on emphasizing those markets that create the most value for our shareholders and have the strongest growth potential.”
 |
|
|
Vice Chairman Alton Kuioka, whose executive portfolio includes the Western Pacific, also makes the point that the regional banking environment has changed dramatically over the past four decades. (Bank of Hawaii last year celebrated the 40th anniversary of operations on Guam.)
“The whole (regional) economic scenario is not sufficient to support several banks there,” Kuioka told Pacific Magazine in an interview. “We’re there. Bank of Guam is there. Bank of FSM and Bank of Marshall Islands are there. With a limited population and a small economic base, it’s challenging to have that many banks there. As we looked at our current strategy and how we can provide shareholder value and economic return, we decided that closing those four branches would be the best decision for us.”
From the shareholder’s standpoint – and that’s the viewpoint that counts at a publicly traded company — O’Neill’s clearly focused strategy has worked. Shares of Pacific Century Financial Corp. (NYSE:BOH) were trading at around $11 when O’Neill took control in late 2000. By early March of this year, BOH was trading at about $26 a share, down from its 52-week high of $28.30. The bank was once Hawaii’s largest by assets and is now No. 2 compared to rival (and now French-owned) First Hawaiian Bank, a unit of BancWest Corp.
While the need to continue boosting shareholder value is the major reason Bank of Hawaii is withdrawing from the Marshalls and FSM, the decision might have been avoided. In fact, why Bank of Hawaii made the decision it did says as much about the lack of broad-based economic development and the politics of development in both the Marshalls and Federated States as it does about O’Neill’s agenda.
At least three additional factors were critical to Bankoh’s decision to sell its operations in the Marshalls and FSM:
 |
|
|
“If anything, in real dollars in 2002 and 2003, whenever the (new) Compact comes through, those dollars may be less than what the FSM got 15 years ago in its first draw down, when you take inflation into consideration,” Leach told Pacific Magazine.
If Bank of Hawaii’s decision is understandable from a shareholder standpoint, it is surprising that the bank badly bungled the February announcement in the Marshalls and FSM. Local business and government leaders are angry, and Bank of Hawaii will have to deal with the consequences of its public relations problem for some time.
In Majuro, Chamber of Commerce President Don Hess’ response is typical of the regional reaction. “The private sector feels Bank of Hawaii abandoned the community,” says Hess. “It’s not that they weren’t making money. (The decision to pull out is) because they weren’t making enough profit.”
| Bank of Hawaii - What's Left |
| Guam |
| Bank of Hawaii: 3 Branches |
| First Savings and Loan Association 6 branches |
| Country Manager: Thomas Michels |
| West Pacific Corporate Banking: David Buehler |
| Financial Services: Robert Richie |
| Saipan |
| Bank of Hawaii: 1 Branch |
| Manager: John Sheather |
| Palau: |
| Bank of Hawaii: 1 Branch |
| Manager: Stephen Brock |
| Deposits for the entire West Pacific Division total $655 million Total Assets for the entire Division total $715 million |
Hess indicated that the Bank of Hawaii move was done without consultation with business and community leaders in the Marshalls, and leaves the Marshall Islands with no choice if the use of an FDIC-licensed bank is required. Bank of Guam is the only other FDIC bank in the Marshall Islands (see related story).
The strongest criticism of Bank of Hawaii’s withdrawal comes from FSM President Leo Falcam, who is furious with the bank’s decision and how it was handled. “I was terribly surprised. Very surprised,” Falcam told Pacific Magazine in an interview shortly after the bank’s announcement. “Somebody visited me several weeks before and assured me that FSM would not be impacted (by the sale of their South Pacific facilities.).”
What galls Falcam the most is how Bank of Hawaii informed the FSM of its decision to leave. The bank asked for a “courtesy call” by Guam-based executive Ted Murray, Falcam recalls. “The courtesy call turned out to be the news that they were selling out.” That meeting took place one day before the bank released the news to the public.
In what will almost certainly be a vain effort to keep Bank of Hawaii in the FSM, Falcam sent a letter to Bankoh Chairman O’Neill on Feb. 14, a week after the bank publicly announced its decision to divest. Falcam made available to Pacific Magazine in early March a copy of his letter to O’Neill. (A senior Bank of Hawaii executive says O’Neill responded to Falcam’s letter in mid-March.)
In his letter, Falcam wrote: “My personal and official interactions with many senior officers of the Bank of Hawaii have been positive over many decades. I am very concerned that the notification of this change in the Bank’s stated intentions has been given without notice or discussion of the underlying issues and alternatives that may still exist. Moreover, I am deeply concerned that prior consultations with national and affected state leaders were not undertaken before you made the decision to withdraw from the FSM.”
It isn’t clear what bank is the leading candidate to acquire Bankoh’s Marshalls and FSM branch systems. A senior Bank of Hawaii executive says First Hawaiian Bank was among those that were approached about acquiring the assets. That seems unlikely, even in light of First Hawaiian’s recent acquisition of significant Union Bank assets on Guam and Saipan.
What is clear is that under O’Neill, Bank of Hawaii has pledged to Wall Street to meet its financial targets. While he’s softened his image in recent months in a series of brilliant television commercials (to make up for public relations problems in the Hawaii market arising from its “New Era” reengineering program), O’Neill’s mostly imported team of senior executives are numbers driven.
That “back to financial basics” approach, while applauded by stock holders and financial markets, means Bank of Hawaii’s future in the Western Pacific isn’t a given.
Just as O’Neill ordered Bank of Hawaii to sell off its South Pacific, Asian and U.S. mainland assets, so too could a new owner of Bank of Hawaii divest itself of its remaining non-Hawaii operations: Guam, Palau, Northern Marianas and American Samoa. O’Neill has long insisted he’s not reshaping the bank to sell it, though the reality is that his program is making Bank of Hawaii a more attractive (and higher-priced) prize.
In fact, if anything is clear following two years of turmoil for Bank of Hawaii in the Pacific Islands, it is that the region isn’t shielded from the forces of the global economy. Large investors will be attracted to the region, and remain active, only as long as they can earn the returns they expect in a reasonable period of time. History and decades of personal relationships aren’t enough to keep investors interested. That’s the major lesson Pacific Island governments can learn from Bank of Hawaii’s decision to leave the FSM and Marshall Islands.
Photo: Emilio Banuelos, Floyd K. Takeuchi
