Fitch Upgrades Butterfield Bank’s Viability Rating

June 11, 2013

Credit rating agency Fitch has today [June 11] affirmed The Bank of N.T. Butterfield & Son’slong-term Issuer Default Rating [IDR] at A- and retained its stable outlook.

Fitch also upgraded the Bank’s stand-alone Viability Rating [VR] to bbb- from bb+. The overall rating of A- is consistent with the equivalent ratings of the other two major rating agencies.

Explaining the increase in Butterfield’s VR, the Fitch report noted Butterfield’s strong market position, liquid balance sheet, good capital levels, and diversified revenue stream.

The above rating affirmations and changes follow Fitch’s downgrade of Bermuda on 7 June 2013. Butterfield’s IDR and outlook were unaffected by that downgrade.

Brendan McDonagh, Butterfield’s Chairman & Chief Executive Officer, said, “It is pleasing that Fitch has recognised the strength of Butterfield’s balance sheet in affirming the Bank’s credit ratings and raising its Viability Rating. This reflects the intrinsic creditworthiness of the Bank and the effectiveness of our current risk management, financial management and corporate governance approach.”

The full statement from Fitch is below::

Fitch Ratings has affirmed Bank of N.T. Butterfield & Son Limited’s (BNTB) long-term Issuer Default Rating (IDR) at ‘A-’. The Rating Outlook remains Stable.

In addition, Fitch has upgraded the banks’ Viability Rating (VR) to ‘bbb-’ from ‘bb+’ and removed it from Rating Watch Positive. A complete list of ratings is provided at the end of this release.

BNTB’s ratings and Outlook are unaffected by the recent downgrade of Bermuda’s foreign currency long-term IDR to ‘AA-’ from ‘AA’.

RATING DRIVERS AND SENSITIVITIES – VRs and SUBORDINATED DEBT

The upgrade of BNTB’s VR reflects its strong market position, liquid balance sheet, good capital levels, and diversified revenue stream (with fee based revenues representing almost 40% of total revenues), offset by significant product concentration in residential lending, geographic concentration in Bermuda and large exposures in its commercial loan portfolio.

Although BNTB continues to face asset quality pressures, specifically in its residential loan portfolio, Fitch expects net losses to remain manageable. Despite BNTB’s non-performing assets (NPAs; inclusive of accruing troubled debt restructurings and foreclosed real estate) remain high at 4.05% as of March 31, 2013, average 5Q NCOs remain extremely low at 26 basis points (bps).

Further upward movement on the VR is considered unlikely unless the company experiences a significant increase in core profitability and materially reduces its non-performing loans, while continuing to maintain high levels of capital. Conversely, a downgrade of the VR could occur in the event of significant deterioration of financial performance, a rise in NCOs due to asset quality pressures, and an increase to the risk level of the balance sheet mix.

Subordinated debt issued by BNTB is notched down from the VR, and the rating of specific issues is typically sensitive to any change in the bank’s VR. In conjunction with the upgrade of the VR, Fitch has upgraded BNTB’s subordinated debt to ‘BB+’ from ‘BB’.

RATING DRIVERS AND SENSITIVITIES – IDR AND OTHER HYBRID SECURITIES

The affirmation of BNTB’s IDR reflects BNTB’s Support Rating Floor (SRF) of ‘A-’ due to its systemic importance to the local economy, as well as demonstrated support from the Bermudian government given its guarantee on the principal and interest payments of BNTB’s outstanding preferred stock. Additionally, Bermuda also owns an equity stake in BNTB through a sovereign pension fund. Given these factors, Fitch considers support from the Bermuda government to be extremely high.

Although Fitch’s view includes a strong probability of support in determining BNTB’s IDRs, these ratings could be adversely affected if the willingness and/or capacity of the Bermudian government to support BNTB in the event of need were to change. Fitch’s IDRs on Bermuda are a reflection of the government’s ability to support BNTB.

Despite its Negative Outlook on the Bermuda sovereign, Fitch’s Outlook on BNTB’s IDR remains Stable on the basis that even if the sovereign’s ratings were downgraded by another notch, Fitch could maintain the SRF at its current level. This is based on Fitch’s belief that the government’s propensity and ability to support BNTB, if necessary, would remain intact.

Fitch would assess the government’s ability to support BNTB and potentially revise the SRF if the sovereign’s rating were downgraded by more than one notch.

Preferred stock issued by BNTB is equalized with Bermuda’s foreign currency long-term IDR, reflecting the guarantee from the Bermuda Government. Fitch has downgraded the preferred stock issuance to ‘AA-’ from ‘AA’ following the sovereign ratings downgrade.

BNTB’s preferred stock rating is highly sensitive to any changes in the ability of the Bermuda government to fulfill its obligation.

RATING DRIVERS AND SENSITIVITIES – SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch considers BNTB to be a systemically important institution to the local Bermuda economy and as such considers the level of support from the government to be extremely high. This support was demonstrated by the governments guarantee on the principal and interest payments of BNTB’s outstanding preferred stock. Based on the high support level, Fitch affirms the bank’s SRF at ‘A-’.

Fitch has taken the following rating actions:

Bank of N.T. Butterfield & Son
–Long-term IDR affirmed at ‘A-’; Outlook Stable
–Short-term IDR affirmed at ‘F1′;
–Viability Rating upgraded to ‘bbb-’ from ‘bb+’;
–Preferred stock downgraded to ‘AA-’ from ‘AA’;
–Subordinated debt upgraded to ‘BB+’ from ‘BB’;
–Support rating affirmed at ’1′;
–Support Floor affirmed at ‘A-’.

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