Fitch Affirms Bank Of Butterfield’s Ratings
Fitch Ratings has affirmed Bank of N.T. Butterfield & Son Limited’s [BNTB] long-term Issuer Default Rating [IDR] at ‘A-’ and Viability Rating [VR] at ‘bbb-’. The Rating Outlook is Negative.
A statement from Fitch said, “The Outlook reflects Fitch’s evolving views of sovereign support. Fitch envisions the resolution of the Rating Outlook could extend beyond the typical 18 to 24-month Outlook horizon given the evolving nature of sovereign support dynamics.
“BNTB’s ratings are unaffected by the recent downgrade of Bermuda’s foreign currency long-term IDR to ‘A+’ from ‘AA-’ Fitch noted in the RAC dated June 11, 2013, ‘Fitch Affirms Bank of N.T. Butterfield & Sons Ltd IDR at ‘A-’; Upgrades Viability Rating to ‘bbb-’, that a one-notch downgrade would not translate into a downgrade of the IDR, which is currently at the support floor rating of ‘A-’.
“BNTB’s VR reflects its strong market position, liquid balance sheet, and good capital levels, offset by modest earnings measures, significant product concentration in residential lending, geographic concentration in Bermuda and large exposures in its commercial loan portfolio. Although BNTB’s credit performance has improved, nonperforming loans remain higher than similarly rated peers and when compared to Fitch rated U.S. community banks.
“Historically, BNTB has operated with above-average liquidity in the balance sheet evidenced by its low loan-to-deposit ratio averaging 53.7% over the last five years. Further, the company has strong capital ratios which support its risk profile. BNTB’s Fitch Core Capital/RWA ratio averaged 11.4% for the last five years.
“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] remaining high at 3.5% as of Dec. 31, 2013, average net chargeoffs [NCOs)]remain extremely low at 44 basis points [bps].
“More recently, BNTB’s earnings improved with return on assets [ROA] and net interest margins [NIM] reflecting a positive trend. Most of the improvement was supported by increased net interest income due to investment revenue yields rising and a rise in fee revenues, while expenses have been relatively flat. Nonetheless, Fitch notes that earnings measure remain in line with similarly VR ‘bbb-’ rated peers. Also, when compared to U.S. Community banks, performance is below peer averages.
“BNTB’s VR could see positive momentum should the company demonstrate sustainable core profitability improvement while materially reducing its non-performing loans. Although capital measures are very high and may come down, Fitch would expect BNTB to continue to operate with above-average capital position.
“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.
“The affirmations of BNTB’s IDR, SR and SRF reflect its systemic importance to the local economy, as well as demonstrated support from the Bermudian government in the past, namely the 2009 guarantee on the principal and interest payments of BNTB’s preferred stock. The preferred stock rating would be unaffected by any changes to BNTB’s SR or SRF as it is based off of sovereign support.
“However, the revision of the Rating Outlook to Negative reflects Fitch’s evolving view of support from Bermuda. Fitch considers Bermuda to be a Path 2 country, defined as one in which there is a weakening of sovereign support of the banking sector.
“The Bermuda Monetary Authority’s (BMA) proposal regarding a statutory framework for a special resolution regime for banks licensed in Bermuda embeds many of the provisions of the UK Banking Act of 2009, according to the BMA. It proposes to provide the authorities with the necessary stabilization powers to transfer part or all of a failing bank’s business to a private-sector purchaser, assume control of part or all of a failing bank’s business through a bridge bank, and acquire temporary public ownership of a bank where required. The proposed framework suggests a weakening of support for the financial sector over time, in Fitch’s view.”
“BTNB’s IDR is sensitive to changes in the SRF as the IDR is at its SRF. Fitch adopts a ‘higher of’ approach in assigning Long-Term IDRs to financial institutions, taking the higher of the SRF and the standalone financial strength [as reflected in the VR of 'bbb-' for BTNB]. In this case, BTNB’s IDR relies on the SRF of ‘A-’. If the SRF is downgraded, BTNB’s IDR would be vulnerable to a downgrade to as low as its VR of ‘bbb-’.
“As a Path 2 country, SRF revisions for systemically important banks are likely initially to be up to one rating category [e.g. a SRF in the 'A' range could fall into the 'BBB' range], while SRF revisions for mid-sized or small banks could be greater, potentially as far as ‘No Floor’. Fitch considers BNTB to be a systemically important institution to Bermuda, as it represents approximately 40% of banking assets.
“Fitch will also 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. The ability has clearly come into question given the weakening fiscal position of the sovereign.”
