Moody’s Downgrades BCB’s Deposit Rating

February 10, 2016

Moody’s Investors Service has downgraded the long term deposit and issuer ratings of Bermuda Commercial Bank Limited [BCB] to Ba3, from Ba2, the bank’s standalone baseline credit assessment [BCA] and adjusted BCA to ba3 from ba2, and counterparty risk [CR] assessment to Ba2[cr] from Ba1[cr].

“The bank’s short term ratings and counterparty risk assessment of Not Prime and Not Prime[cr], respectively, were affirmed. The outlook for the ratings is now stable,” the ratings agency said.

“This action concludes the rating review initiated on 28 September 2015, following BCB’s acquisition of 75% of UK-based finance house Private and Commercial Finance Group PLC [PCFG] from its parent holding, Somers Limited [unrated], a financial services investment holding company

“The ratings downgrade reflects Moody’s view that BCB has taken on increased asset risk through its acquisition of PCFG that has raised the bank’s overall risk profile despite its strong capitalization.

“Moody’s notes that the increased asset risk reflects the nature of PCFG’s loan portfolio, consisting of high yield, high loan-to-value consumer auto finance and small and medium-sized enterprise business and leasing finance. These loans carry a much higher level of delinquent and impaired loans and a higher loss content than do BCB’s commercial loans in Bermuda.

“While the PCFG portfolio offers diversification within the UK’s stronger market as well as new asset classes, the venture brings higher risk costs and management challenges. The company’s high growth profile and the cyclical nature of the auto lending business also expose the bank to asset quality deterioration during an economic downturn, said Moody’s.

“Moody’s noted that although the acquisition reduces the comparative dominance of the investment portfolio in BCB’s balance sheet, the bank still maintains a significant concentration in a portfolio of non-investment grade or unrated securities, comprising almost one third of its securities holdings or 1.4 times tangible common equity as of September 2015. While the securities continue to provide income benefits, they also expose the bank to credit and market risks.

“Regarding funding, BCB’s deposit base is highly concentrated in large wholesale deposits that tend to be less stable than retail deposits. To help mitigate this concern, and given that Bermudan banks do not have a lender of last resort, Moody’s expects BCB to maintain its comparatively high level of liquid assets. Moody’s noted that BCB’s capital ratios are relatively high and expects the liquidity pool to remain strong.

“Upward movement of the ratings is unlikely in the near term because of BCB’s higher risk profile. Over the medium term, ratings could be revised upward with substantial improvement in the asset risk profile coupled with sustainable core earnings and strong capitalization.

“Further downward pressure on the ratings could arise if asset quality, capital or liquidity weaken substantially from current levels. Further acquisition activity could also put downward pressure on the ratings.”

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