Butterfield Bank Receives Ratings Upgrades

Fitch Ratings has affirmed Bank of N.T. Butterfield & Son Limited’s long-term Issuer Default Rating [IDR] at ‘A-’ and short-term IDR at ‘F1 and the outlook for the Bermuda financial institution has now been upgraded to Stable.

The international ratings agency has also withdrawn the ‘F’ Individual rating and assigned a new Individual rating of ‘C/D’.

Butterfield’s  Individual rating of ‘C/D’ reflects its improving overall financial condition tempered by its remaining challenges.

Currently, notable strengths include a liquid balance sheet and solid capital ratios. Also, the bank has greater revenue diversity compared with many small banks due to its asset management, trust and custody businesses.

Fitch said concerns remain, however, particularly regarding weak profitability. After large losses in 2010, Butterfield reported small profits in the first quarter of 2011. The performance outlook is brightening owing to diminishing loan portfolio problems and a gradually improving net interest margin [NIM].

However, Butterfield’s profitability is expected by Fitch to remain comparatively weak at least in the near term. In addition, Butterfield is relatively small and geographically concentrated compared with many international banks. The economy of Butterfield’s home market of Bermuda has a large reliance on the insurance industry and to a lesser extent, tourism.

In early 2010, Butterfield suffered from large charges associated with its portfolio of structured securities. Consequently, a restructuring took place including the issuance of $550 million of new equity and the sale of the bulk of the structured securities portfolio.

The recapitalisation was led by the Carlyle Group and the Canadian Imperial Bank of Commerce. Currently, CIBC and the Carlyle Group are the largest shareholders with ownership of 18.8 percent and 17.4 percent, respectively. Post recapitalisation, key management changes were made including CEO, chief financial officer and chief risk officer combined with the addition of new board members with considerable banking expertise.

Butterfield’s long-term IDR is at its support floor of ‘A-’ based the bank’s systemic importance in Bermuda and the Government’s demonstrated support to preserve the financial stability of its largest local bank.

In March 2009, the Bermudian Government guaranteed the principal and dividend payments of the bank’s $200 million preferred stock issuance. Consequently, the rating of this particular issue remains in line with Bermuda’s sovereign foreign currency IDR of ‘AA+’, Stable Outlook.

IDRs could be adversely affected if Fitch’s view of the willingness and/or capacity of the Bermudian Government to support the bank in the event of need changes. An upgrade of the Individual rating is possible if the bank establishes a track record of profitability while maintaining solid liquidity and capital strength.

Conversely, a downgrade of the Individual rating could occur in the event of significant deterioration of financial performance, asset quality and/or capital position.

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