S&P Lowers Ratings: Butterfield, HSBC Bermuda

September 26, 2013

[Updated] Citing a “persistent weakness in the economy,” Standard & Poor’s today [Sept 26] lowered the long-term issuer credit ratings on HSBC Bermuda and Bank of Butterfield, and said the outlooks on both banks is negative.

S&P said, “These actions primarily result from our view that economic risks for Bermudian banks have increased because of the persistent weakness in the economy and a prolonged real estate downturn, which has contributed to a substantial increase in nonperforming loans and credit losses in the industry.

“Bermuda’s economy has weakened in recent years, partly as a result of the departure of a few thousand expatriates, increased unemployment levels, and a sharp slowdown in the real estate market. Moreover, we assess the trend for economic risks to be negative largely based on our projections for unemployment and economic growth.

The ratings agency continued, “Nevertheless, we view the trend for industry risk as stable because Bermudian banks have a high and stable core customer deposit base and have relatively low rivalry given the high concentration of banks.

“Furthermore, although Bermudian banks are concentrated by region, they are well diversified by business lines–which include private-banking, asset-management, and personal-trust services. As a result, noninterest income is a fairly large portion of total revenue for Bermuda’s banks.

The report also indicated S&P thinks there could be “significant losses realized within the hospitality and construction loan portfolio over the next few years. ”

The ratings agency said they view HSBC Bermuda and Bank of Butterfield as “systemically important given their large collective deposit market share and their importance to the local economy.:

The full statement from S&P follows below:

Standard & Poor’s Ratings Services said today it is lowering the long-term issuer credit ratings on HSBC Bank Bermuda (HSBC BB) and Bank of N.T. Butterfield & Son Ltd. (BNTB). The outlooks on both banks are negative. We are lowering the long-term rating on HSBC BB to ‘A’ from ‘A+’ and affirming the short-term rating at ‘A-1′. We are lowering the long-term rating on BNTB to ‘BBB+’ from ‘A-’ and affirming the short-term rating at ‘A-2′.

These actions primarily result from our view that economic risks for Bermudian banks have increased because of the persistent weakness in the economy and a prolonged real estate downturn, which has contributed to a substantial increase in nonperforming loans and credit losses in the industry. These factors led us to revise our Banking Industry Country Risk Assessment (BICRA) on Bermuda to group ’4′ from group ’3′ due to our weaker assessment of Bermuda’s economic risk. Correspondingly, we lowered the associated anchor for Bermudian banks to ‘bbb’ from ‘bbb+’.

Bermuda’s economy has weakened in recent years, partly as a result of the departure of a few thousand expatriates, increased unemployment levels, and a sharp slowdown in the real estate market. Moreover, we assess the trend for economic risks to be negative largely based on our projections for unemployment and economic growth.

For example, the unemployment rate has risen sharply to 8% as of Dec. 31, 2012, from 2% in 2008, according to official estimates, although unofficial estimates put the current unemployment rate closer to 12%. We forecast that the unemployment rate could climb to 12% by the end of 2013 and 14% by the end of 2014 given recent trends. Both residential and commercial real estate values have also fallen significantly from their previous peaks because of the prolonged recession on the island after experiencing significant appreciation over the past decade. On March 28, 2013, we revised our outlook on Bermuda (AA-/Negative/A-1+) to negative from stable because of the prolonged economic downturn, deteriorating fiscal performance, and deteriorating loan performance in its banking sector.

As a result of these economic challenges, nonperforming loans and credit losses within the Bermudian banking industry have increased materially in recent years. We estimate that nonperforming assets (NPA)-to-loan ratios have risen to roughly 10% in the industry, including restructured loans. Furthermore, we think loan portfolios among Bermudian banks could deteriorate somewhat further throughout 2013 and 2014 given economic trends before showing signs of stabilization in 2015, by our forecast. These currently high NPA levels are in sharp contrast with the performance in Bermuda’s banking industry over the previous decade, which had included pristine asset quality with very low levels of nonperforming loans and extremely low charge-offs. If we further lower our assessment of economic risk for Bermuda, as the negative trend indicates, it would very likely lead to a lowered anchor and potentially one-notch downgrades of HSBC Bank Bermuda and Bank of N.T. Butterfield & Son Ltd.

The Bermudian economy is in a “correction phase,” in our view, and Bermudian banks’ credit losses have totaled nearly $220 million from 2010 through 2012 (roughly 2.5% of total loans). However, despite relatively substantial net charge-offs (NCOs) taken in recent years, we expect that Bermudian banks could incur losses of roughly $250 million over the next few years given the currently high and rising level of NPAs. In aggregate, we estimate that the Bermudian banking sector is less than half way through our full-cycle loan-loss projection of $450 million to $500 million by year-end 2015.

We believe that industry risks have not changed substantially in Bermuda. We have lowered our view of banking regulation and supervision to “intermediate” from “strong” partly because of regulators’ willingness to allow capital and dividend distributions amid the currently challenging economy. Nevertheless, we view the trend for industry risk as stable because Bermudian banks have a high and stable core customer deposit base and have relatively low rivalry given the high concentration of banks. Furthermore, although Bermudian banks are concentrated by region, they are well diversified by business lines–which include private-banking, asset-management, and personal-trust services. As a result, noninterest income is a fairly large portion of total revenue for Bermuda’s banks. We view the absence of a central bank as a weakness, but our overall view of systemwide funding has not changed because of factors such as a strong ratio of deposits to loans and a limited share of nonloan assets domestically. We estimate that systemwide domestic loans substantially exceed 40% of total systemwide domestic banking assets based on new disclosures.

HSBC BB has performed substantially worse than its local bank peers over the past two years in terms of loan performance, in our view. Furthermore, we expect that nonperforming loans and credit losses could increase somewhat further given local economic trends. For example, nonperforming loans (including restructured loans) increased to more than 15% as of Dec. 31, 2012, by our calculation, from less than 10% as of Dec. 31, 2010. We think deterioration in hospitality, commercial, and residential mortgage loans are largely responsible. We expect additional weakness within these loan portfolios in part because of the weak Bermudian economy and many residential mortgage borrowers’ lower rental income. We also think there could be significant losses realized within the hospitality and construction loan portfolio over the next few years. When assessing our counterparty credit rating on HSBC BB, we include three notches of support from its stand-alone credit profile (SACP) for our view of its strategic importance to its parent company under our group methodology criteria. As a result, the ‘A’ rating on HSBC BB is three notches above our ‘bbb’ SACP of the bank and two notches below the ‘AA-’ ratings on the group’s “core” operating entities.

Meanwhile, BNTB has performed somewhat better than its local bank peers over the past two years in terms of loan performance, in our opinion. However, nonperforming loans have increased somewhat, and we expect they could increase further given local economic trends. Nonperforming loans increased slightly to 3.9% as of June 30, 2013, from 3.5% as of Dec. 31, 2011, by our calculation. We think substantial charge-offs of NPAs in 2010, notably hospitality and construction loans, have resulted in better relative performance at BNTB in recent years. For BNTB, we include one notch of uplift from its SACP to the long-term counterparty credit rating for potential extraordinary government support. We view the two largest banks (HSBC BB and BNTB) as systemically important given their large collective deposit market share and their importance to the local economy. We view the sovereign’s tendency to support the private sector as “supportive.”

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Update: In response, an HSBC Bermuda spokesperson stated: “Overall, this was an expected result given Bermuda’s anchor rating was similarly lowered by one notch, and in light of continued difficult economic and trading conditions”

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Comments (21)

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  1. Triangle Drifter says:

    The fallout from the PLP reign of ineptness continues. The OBA has no magic switch to turn the economy around instantly despite the expectations of PLP supporters. The damage done is far more complex than they could ever hope to understand.

    • yesman says:

      Why do people like you always have to make every article on Bernews a blame the PLP event? Or a PLP vs OBA bashing match.

      Why don’t you post something informative or an unbiased opinion for once.

      • Triangle Drifter says:

        Oh I see, in your opinion the mismanagement of Bermudas affairs from 1998 to 2012 has nothing to do with the dire financial situation Bermuda is in today.

        In your opinion, the last 14 years should be wiped from history.

        In your opinion those who voted the PLP in those years should not be reminded of, or held accountable for what they did.

        In your opinion that little matter of $2B debt is not real. That little matter of $200,000 per day interest on that debt is not real & is nothing to be reminded of.

        I think I understand.

        • Black Soil says:

          The recession which struck in 2008 was MASSIVELY EXASPERATED by stupid PLP economic policies. Leading up to the recession the PLP spent us to the dog house, so when the recession hit there were no reserves in place to turn things around. INCOMPETENCE.

    • AwayFromHome says:

      Really? And I suppose the global recession had nothing at all to do with it! Other countries have similar issues citing fallout from the recession but only in Bermuda do I see inane comments continuing to blame a political party.

      • Sandy Bottom says:

        Actually, most other countries have been out of recession for years. The PLP wanted us to believe it was a “worldwide” problem, trying to make out it was inevitable. It was all lies. It could have been very different for Bermuda if they hadn’t screwed us.

  2. Vote for Me says:

    A non political analysis will show that the recent decision to borrow $800m without a 3 to 5 year plan for Bermuda was a mistake.

    Many will talk about PLP increasing the debt from $160m to $1.5bn in 14 years (which was problematic) at 17.35% compounded annually but few will talk about the OBA increase from $1.5bn to $2.3bn in less than a year (also problematic) at 53.3% compounded annually.

    Lets hope Bermuda can make changes to avoid another downgrade for the country.

    • Loquatz says:

      The only other option was to immediately lay off half the civil service.

    • Sandgrownan says:

      Although, i suspect the extra borrowing was made to cover already committed/approved expenses. Rather like raising the debt ceiling in the US

  3. Navin R. Johnson says:

    I will try to explain the increase to you vote for me so follow along if you can…..the PLP ran budget deficits every year(that means they spent more than they took in) the OBA is saddled with debt and a bloated Civil Service and has to continue borrowing if and until the economy improves…so rather than go back year after year they borrowed 3 years of deficits at today’s lower interest rates…they may not use all of the money…with me so far? It all is the fault do the PLP…they drove people out of Bermuda who were paying many of the taxes ….only seems like yesterday that Paula cox was saying that there were not that many people unemployed only a small percentage when it was really 12%. You were lied to over and over again for years and without releasing any real data the rating agencies were left to guess and now they are seeing the devastation that the PLP left us with…….it is only when the tide goes out that we see who is swimming naked….so thank you PLP for what you did to everyone but a select few friends and family

    • yesman says:

      “The PLP ran budget deficits every year(that means they spent more than they took in”.

      When the economy started to decline, the government took less money in which was not a result of the PLP but I can agree that some of the capital projects didn’t have to take place. In addition, I don’t know why there are more government workers now than 10 years ago. I’m not sure if government is providing more services or the same. Maybe someone can answer that question for me.

      But in my honest opinion, a lot of the government infrastructure enhancements were needed and hadn’t been upgraded or renovated in over 30 years. If the previous government could foresee the future and would have known the economy would decline they would have taken different steps and decision making would have been altered in the process.

      It’s easy for us to look back at the past and analyze decisions, but we must put ourselves in their shoes at that time with the knowledge they had. Let’s keep in mind at one point our GDP was increasing every year, and the island was generating a lot of cash and government revenues were higher.

      • Sandy Bottom says:

        Our GDP was increasing for years, along with govt revenues. Did they preserve thatvwealth? Did they put Bda in a stronger financial position, using that wealth? No. They spent it on stupid stuff. They borrowed and spent and spent. And as the economy started to falter, they borrowed and spent more, while alienating IB.

        It could all have been so different. But they screwed us.

  4. Truth is killin' me... says:

    Lets hope ALL you politicians may they be FLUORESCENT GREEN or CANDY APPLE RED be frugal with your spending NO MATTER WHO IS IN POWER! THOSE DAYS ARE LOOOOOOOOOOOOONG GOOOOOOOOOOOOOOOOONE and Bermuda cannot afford it!!!!

  5. Ben Dover says:

    I pulled my money out of BNTB a while ago (after the debacle where CIBC had to bail them out) and moved it to CapG.

    The Bermuda economy is a whole lot worse than back in 2010. Can’t imagine things have improved at BNTB.

    • Politically Incorrect says:

      You think things are a whole lot better at CapG? i doubt it.

      • Family Man says:

        And there’s no chance of Capital G being considered systemically important enough to be bailed out by the government. Can you imagine the government bailing out a Gibbons Group company?

  6. Vote for Me says:

    @ Navin – not so fast.

    You are taking the typical stance of ‘the PLP did it’ and the OBA had to continue.

    I ask you a simple question? What plan does or did the OBA have when they decided to borrow 3 years deficits? Was there a goal to have a balanced budget in year 4? What happens if they have to borrow again in year 4?

    If you need additional analysis, look at teh various comments in the media.

  7. haha says:

    Thanks PLP for turning this island to s**t!! It’s only going to get worse.

  8. Babylon says:

    The PLP sold us out.
    As for the greedy banks,serve them right.Expect layoffs in the banking sector real soon.The only reason why one bank is “turning the corner ” is because it has already cut its staff.The other one is going to have to cut further.
    Do not look for Govt to help,the unaccountable,suspected corruption is starting to have an effect,and the new govt has no money.We are broke and getting broker!