American Savings Bank is expected to emerge as a stronger financial institution once it is spun off from parent Hawaiian Electric Industries Inc. next year.
The state’s third-largest bank will realize several benefits from being a stand-alone company, but one of those benefits will come at the expense of merchants, who will find themselves paying more fees for ASB-branded debit card transactions.
STATE’S LARGEST BANKS
Hawaii’s largest banks by assets as of Sept. 30, 2014:
| 1. First Hawaiian Bank |
$18.1B |
| 2. Bank of Hawaii |
$14.51B |
| 3. American Savings Bank |
$5.44B |
| 4. Central Pacific Bank |
$4.75B |
| 5. Territorial Savings Bank |
$1.66B |
Source: Individual banks
|
American Savings, acquired by HEI in 1988, will be on its own again after the recent $4.3 billion acquisition of HEI by Florida-based NextEra Energy is finalized. The bank, which will be spun off as part of that deal, became handcuffed in how much it could charge merchants per electronic debit transaction after HEI’s assets reached $10 billion at the end of 2012 and triggered the Durbin Amendment. That 2011 law, designed to lower costs for merchants and, subsequently, customers, capped "interchange" fees that big banks can charge merchants at 21-24 cents. It began affecting American Savings on July 1, 2013.
During the first half of 2013, American Savings earned an average of 49 cents per electronic debit transaction. But after that law took effect for the bank, ASB earned an average of 23 cents per electronic debit transaction in the second half of that year. The full-year impact reduced net income after taxes by $6 million over 2012.
Through the first three quarters of this year, ASB’s pretax debit card interchange fees were $4 million lower than the same period a year earlier.
"We lost some interchange income because HEI as a whole went above $10 billion (at the end of 2012) and it triggered banking regulations that apply to institutions that are bigger than $10 billion even though as a bank we’re only $5 billion," American Savings President and Chief Executive Officer Rich Wacker said during an interview at the Honolulu Star-Advertiser office on Dec. 4. "So we got caps on debit card interchange income, and we would be exempt from those caps again. That’s almost 10 percent of our profit we would get back. So that gives us more resources to grow the bank and do a better job for our customers."
HEI spokesman Cliff Chen said even though merchants using American Savings-branded cards will be paying more fees after the spinoff, the bank "will be charging competitive rates."
First Hawaiian Bank, with $18.1 billion in assets, and Bank of Hawaii, with $14.51 billion in assets, also must abide by the Durbin Amendment.
Chen said it was unlikely that merchants accepting ASB-branded cards would raise prices simply because American Savings was raising its swipe fees.
"Merchants would have to be seeing a lot more ASB cards than anything else to start (raising consumer prices)," Chen said. "It’s a large marketplace. Fees are negotiated with merchants and it depends on the type of cards and rewards. Our merchants are pretty much everybody else’s merchant."
American Savings, which had $5.44 billion in assets and $39.5 million in year-to-date net income at the end of the third quarter, also will generate additional capital in other ways. One bonus is that it no longer will have to pay dividends to HEI.
"Right now American Savings pays about 70 percent of its net income to HEI to fund the utility’s (capital expenditures)," said New York-based analyst Andrew Weisel of Macquarie Capital USA Inc. "After the deal, ASB will only pay a dividend (to shareholders) of 30 to 40 percent. So it will give them more free cash to do things like share repurchases."
Wacker said the additional income will give the bank more options.
"Right now we’ve been in a mode of providing capital to the holding company and to the utility because that’s been our role — to be a good solid provider of capital," he said. "We’ll have more flexibility on what to do with that capital now as we generate it each year. We’ll give dividends to our shareholders, but with the rest of it we can invest it in the bank, or we can do buybacks, or we can do other things with it. That would help make it more interesting to us."
Wacker said the transaction will make the bank stronger because of the way the deal is structured and the way that the shares of the bank will be distributed. HEI shareholders will receive a pro rata distribution of stock in American Savings based on their stock ownership in HEI.
"We get an increase in our capital," Wacker said. "And for a bank, capital is everything. That’s your lifeblood. You can use that to do more things for your customers. That’s what you use to help to grow the bank. We get more capital. We have stronger capital ratios. That makes us even healthier."
NextEra Energy and HEI said the deal, which needs regulatory and shareholder approvals, is expected to be completed within 12 months.
But Weisel said he thinks the deal will require more time.
"My guess is that it will take longer," he said. "No. 1 is because the Hawaii (Public Utilities) Commission is pretty small so everything tends to take a little bit longer than other states with a bigger staff. No. 2 is because the state is going through the business of long-term strategic planning and it may be a question of how hard it is to prioritize the acquisition approval and whether (the PUC) will be able to do them simultaneously or not."
Several law firms have launched investigations regarding the fairness of the sale to investors, but Weisel said that’s to be expected.
"I’m not too worried about that," he said about potential roadblocks to completing the deal. "That happens every single time there’s an acquisition. Regulatory approval might be tricky because Hawaii regulators are known as being very tough. The companies laid out clearly what the benefits to Hawaii are, but the regulators probably want more detail and a better understanding before approving the deal."
American Savings, which said it will retain its name, plans to remain headquartered in Hawaii and keep its current management team. The prospects of ASB being snapped up by another bank after the spinoff are unlikely, Weisel said.
"It would be easier now as a stand-alone," he said. "Having said that, there are really only four big banks (First Hawaiian, Bank of Hawaii, American Savings and Central Pacific) in Hawaii so (an acquisition) probably would create some questions about market share if possibly one of the other ones were to acquire it. Possibly a mainland bank could come in, but being an island, there’s a limit of how much growth could be seen. So I’d say it’s unlikely but more likely than being a subsidiary of HEI."
