Hawaiian bankers wary of delta variant even as tourism recovers

Hawaii’s leading banks are increasingly optimistic about the local economy and their own prospects in the second half of 2021, as tourism numbers rebound and feed the islands’ financial lifeblood. But a resurgence of coronavirus cases could hurt this recovery.

Americans from the U.S. mainland, eager to travel after more than a year of pandemic-induced lockdown, are flocking to Hawaii this summer. It is not yet enough to fully offset continued doldrums in other countries that provide foreign tourists to Hawaii’s tourism-driven economy — most notably Japan, which is currently in partial lockdown mode. But bankers say the momentum is strong enough to warrant confidence, barring new travel restrictions to combat the highly transmissible delta variant of the virus.

“The economy here in the islands is steadily improving, really being driven by a nice improvement — or regaining traction — in the visitor industry,” Peter Ho, Bank of Hawaii's chairman, president and CEO said on the company’s second-quarter earnings call last week.

Citing University of Hawaii Economic Research Organization data, Ho said the size of the local economy at the end of the second quarter had reached 72% of its pre-pandemic level. Three months earlier, it was 62%.

Data from the Hawaii Tourism Authority shows that the level of visitors to the islands by the end of June 2021 reached 74% of 2019’s pre-pandemic average, while visitor spending reached 80%. In addition, 97% of hotel rooms had returned to service by midyear, with an occupancy rate of 77%, compared to 84% the year before virus outbreaks.

In an average year, a fifth of Hawaii’s population works in hospitality — hotels, resorts and related retail businesses — according to state data. More than half of Hawaii's retail revenue is tied to tourism.

Successful vaccination programs, launched late in 2020 and early this year, marked a turning point. Travel restrictions eased and sparked Hawaii’s economy. The state’s jobless rate still hovered above 10% to start this year, but it is now down to 7.7% and is forecast to finish the year at 6.0%, according to the University of Hawaii. The national jobless rate stood at 5.9% in June, according to the U.S. Department of Labor.

The Hawaiian recovery “continues to progress well and the return of international travel will provide the next leg up,” Piper Sandler bank analyst Andrew Liesch said, noting that international travelers historically have been “higher spenders.” However, because the pandemic is ongoing, the “timing remains uncertain.”

The $22.7 billion-asset Bank of Hawaii and the $24.2 billion-asset First Hawaiian, both based in Honolulu, are by far the largest banks in the state. Each had amassed robust capital levels and maintained strong credit quality and long runs of profitability ahead of the pandemic. Those strengths, coupled with federal government aid programs that benefited their clients, bought the banks time to ride out virus-induced lockdowns.

Bank of Hawaii reported second-quarter net income of $67.5 million, or $1.68 per share, up from $38.9 million, or 98 cents, a year earlier. Its charge-offs were just 0.04% of average loans, down from 0.18%.

First Hawaiian, meanwhile, reported second-quarter net income of $86.7 million, or 67 cents per share, up from $20.0 million, or 15 cents, in a year earlier. Its charge-offs were 0.03% of average loans, down from 0.67%.

With the special unemployment and small-business aid unwinding this year, however, neither bank’s clients can afford another setback. If new lockdowns are ordered, business failures and job losses could mount quickly — and loan losses could follow. And the specter of such a scenario looms large.

“Similar to the rest of the country, we have seen increases in new cases recently and the test positivity rate, which authorities are closely monitoring,” Robert Harrison, First Hawaiian's chairman, president and CEO, cautioned on the company’s recent earnings call.

The Centers for Disease Control and Prevention last week published an analysis showing that vaccinated people can spread the delta variant and may already be contributing to a new surge in infections.

Cases are on the rise in the United States and globally, creating a challenge for a state such as Hawaii that depends on tourists from not just North America but also Asia and Europe.

The United States reported about 70,000 cases per day last week, an increase of more than 50,000 in the daily average since the start of the summer, according to Johns Hopkins University’s Coronavirus Research Center. The infection rate has not been this high since last winter, prior to widespread vaccinations.

Worldwide, the delta variant is surging, according to the head of the World Health Organization.

“Hard-won gains are in jeopardy, or are being lost,” WHO Director General Tedros Adhanom Ghebreyesus said last week during a webcast briefing. Nearly 4 million infections were reported globally last week, up from 3.5 million the previous week, he said. Both cases and death totals “have continued to climb,” Tedros said.

To be sure, Hawaii already knows how dire conditions can get in a pandemic. The state’s jobless rate went from the nation’s lowest at the start of 2020 to the highest by spring of last year, topping 20% in April and May.

Another way to look at it: State data show there were 15,223 visitors in Hawaii on any given day in June 2020, compared to 277,930 visitors per day in June 2019, Eugene Tian, Hawaii’s chief state economist, said in a report. This bounced back to 255,936 a day in June 2021 — a substantial recovery, but one that may not last if the pandemic applies new pressure.

Paul Yonamine, Chairman and CEO of the $7.2 billion asset Central Pacific Financial in Honolulu, noted on the company’s earnings call in late July that Hawaii's vaccination rate — 60% — is better than the national average of about 50% fully inoculated.

But the state is vulnerable to tourists spreading the disease. As such, Yonamine said, Hawaii is “not immune to the spike caused by the delta variant.”