Standard & Poor’s On Bermuda Bank Ratings

July 1, 2014

Standard & Poor’s Ratings Services said today [July 1] that it lowered its long- and short-term issuer credit ratings on HSBC Bank Bermuda [HBBM] to ‘A-/A-2′ from ‘A/A-1′, with a negative outlook.

The ratings agency said, “Bermuda’s economy has weakened since the global financial markets dislocations and recession that began in 2008, reflected in five years of continuous real declines in Bermudian GDP, the departure of several thousand non-Bermudians from the small [less than 40,000] labor force, increased and sustained unemployment among the remainder, and a very significant and extended correction in the local real estate market. These factors have resulted in a substantial rise in nonperforming loans and credit risks for the banking sector, in our opinion.”

The statement from Standard & Poor’s is below:

Standard & Poor’s Ratings Services said today that it lowered its long- and short-term issuer credit ratings on HSBC Bank Bermuda [HBBM] to ‘A-/A-2′ from ‘A/A-1′, with a negative outlook, and removed the ratings from CreditWatch with negative implications, where they had been placed March 11, 2014.

Standard & Poor’s affirmed its ‘BBB+/A-2′ long- and short-term issuer credit ratings on Bank of N.T. Butterfield & Son Ltd. [BNTB], with a negative outlook.

We have reviewed Bermuda’s [AA-/Negative/A-1+] banking sector under our Banking Industry Country Risk Assessment [BICRA] methodology, and as a result, we now assess economic risk as higher than we previously thought.

“This reflects our view that the correction phase to previously built-up economic imbalances, principally concerning local real estate valuations, will be longer and significantly more impactful than we had previously assumed,” said Standard & Poor’s credit analyst Nikola Swann.

We now believe full-cycle cumulative credit losses will be in the range of $1.0 billion-$1.2 billion [2009-2016], only about half of which have been realized, in light of nonperforming assets that continued to increase, as a share of total loans, in each quarter of the five most-recently reported quarters [ending fourth-quarter 2013].

Bermuda’s economy has weakened since the global financial markets dislocations and recession that began in 2008, reflected in five years of continuous real declines in Bermudian GDP, the departure of several thousand non-Bermudians from the small [less than 40,000] labor force, increased and sustained unemployment among the remainder, and a very significant and extended correction in the local real estate market. These factors have resulted in a substantial rise in nonperforming loans and credit risks for the banking sector, in our opinion.

Moreover, on March 28, 2013, we revised our outlook on our sovereign rating on Bermuda to negative from stable because of the prolonged economic downturn, deteriorating fiscal performance, and deteriorating loan performance in its banking sector. We affirmed this position on April 1, 2014.

We believe that industry risks have not changed substantially in Bermuda since we last commented on our BICRA.

Under our methodology, the deterioration in economic risk lowers our anchor for ratings on banks based in Bermuda to ‘bbb-’ from ‘bbb’. This results in our lowering our stand-alone credit profile [SACP] on HBBM, Bermuda’s largest bank, to ‘bbb-’ from ‘bbb’, and our long-term and short-term issuer credit ratings on HBBM to ‘A-/A-2′ from ‘A/A-1′.

The ratings continue to incorporate three notches of support from HBBM’s parent, HSBC Holdings PLC [A+/Negative/A-1], as HBBM is a subsidiary that we believe remains “strategically important” to the parent. The CreditWatch placement followed HBBM reporting a significant deterioration in loan performance and large, discretionary dividend payments to its parent, both in 2013.

Under our methodology, lowering our anchor to ‘bbb-’ does not affect the ratings on BNTB, although it does result in our SACP on BNTB likewise falling to ‘bbb-’. The ratings do not change because we continue to view the government of Bermuda as “supportive” of its banking sector, and BNTB, Bermuda’s second-largest bank, as having “high” systemic importance. The lower anchor does mean that if we were to lower our sovereign rating on Bermuda by one notch, we would also lower our ratings on BNTB by one notch.

We view the trend on economic risks in Bermuda’s banking industry as negative. This reflects the economic and fiscal risks encapsulated in the negative outlook on the sovereign, as well as the estimation risk surrounding our projections for full-cycle credit losses, particularly in light of nonperforming assets [NPA]-to-loan levels that are rising and [as far as we are aware] unprecedented in Bermuda.

We expect credit losses to increase throughout 2014 and 2015 before showing signs of stabilization in 2016. Currently high NPA levels are in sharp contrast with the Bermudian banking industry’s much stronger asset quality metrics in the decade preceding 2009.

We view the trend for industry risk in Bermuda’s banking industry as stable. For example, we do not expect any substantial shifts in core customer deposits or the rivalry among banks–we view the latter as low given the small number of banks in Bermuda. Similarly, we do not expect significant alteration in the geographic or business-line diversification of Bermudian banks. Finally, Bermuda has a stable regulatory regime.

The outlook on our ratings on HBBM is negative, reflecting the negative outlook on the ratings of its parent as well as the negative trend on Bermudian economic risk. A downgrade of the parent, evidence that Bermudian economic risk had increased further, or a reason to expect a substantial decline in our risk-adjusted capital ratio for HBBM would likely result in a further downgrade of HBBM. Stability in these factors, including a stable outlook on the ratings on the parent, would be required for a stable outlook on the ratings on HBBM.

The outlook on our ratings on BNTB is also negative, reflecting the negative outlook on the sovereign and the negative trend on economic risk. A downgrade of the sovereign, evidence that Bermudian economic risk had increased further, or a greater-than-expected increase in BNTB’s credit losses would likely result in a downgrade of BNTB. Stabilization in these factors, including a stable outlook on the sovereign, would be required for a stable outlook on BNTB.

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Comments (39)

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  1. What's the Political Spin Here? says:

    This is not good news–and before the spin doctors begin to whip themselves into a whirling dervish frenzy about how the OBA government hasn’t delivered on promises–one must pause with a non critical eye and reflect upon how Bermuda’s economic situation arrived at the place it is today.

    I hope for our kids future that our politicians can cool their rhetoric and focus on fixing the problem

    YOU KNOW WHAT–this includes you Opposition—stop the spin, the divisive propoganda and get to the table and help fix this problem.

    Wildcat strikes, agressive spin–is not going to help us dig out of this problem–just good hard work and attacking it together.

    I challeneg all Bermudians to rise to this and collectively help fix this–its time to stop whining…

  2. Toodle-oo says:

    Landlords and service providers, are you paying attention ?
    Once upon a time it used to be said that half a loaf was better than none.

    Well , now it’s looking like a quarter of a loaf is going to replace ‘a half’.

    The end is nowhere in sight yet .

    • CBA says:

      What strikes me most is that the PLP continues to fight the OBA on every idea the OBA has. The OBA has a plan to bring more people here to bring money with them. The PLP continues to fight against it. The question every Bermudian needs to ask is, why should we listen to the PLP?

  3. Without mitigating anything…

  4. Navin Johnson says:

    All goes back to the failed PLP……departure of workers from a small work force and still the good old PLP in their infinite wisdom wants to stymie immigration……

  5. 32n64w says:

    PLP – Betraying Bermudians since 1998, one unemployed, undereducated and debt ridden ridden voter at a time.

  6. Meeeee says:

    Read that fifth paragraph carefully. S&P are suggesting that the two banks are staring at a potential combined loss up o $1.0 billion to $1.2 billion by 2016.

    the banks have to cover those losses either from current profits or from previously earned and set-aside reserves. If not – belly up!

    People who are asking or suggesting that the banks should ‘loosen up’ their lending policies, need to wrap their small minds around this big cash problem.

    The rough ride ahead is getting rougher.

    • frank says:

      one bank had a half page ad $10,000 invested at 1 percent p.a. after 1 year the investor would get $100 hurray
      but if the bank invested that same amount at 1 percent compounded daily for 300 days they would get over$100’000
      this is why people with money are holding on to their money
      lets face it are banks are no longer Bermuda owned
      so they have no obligations to Bermuda or it’s people banks are in business to make money for the parent company hell last year one bank sent $45m out of here to the parent bank

      • Edmund Wells says:



        $10,000 invested at 1 pct per annum, compounded daily for 365 days, grows to $10,100.50.

        Nothing more; nothing less.


  7. Jiminy villickas says:

    Meeeeee….I am in top 2%…of any loan they have ever done..both of my buisiness loans paid off both at 2-1/2 years ahead of date due….with all incrued interest… are either in buisiness to make money in bank charter manner or not…..!they were both two thee to fou year loans ….paid in cash !…..but will they give me a buisness loan….*uck no….why the *not?

  8. Kangoocar says:

    Will the plp talking heads take note of the ” with the departure of thousands of non Bermudians in the workforce of less than 40,000 work force??” But you just keep pushing this anti foreigner stuff??? You plper’s get more stupid by the day!!! Why don’t you stop listening to your leaders and do your own research and start thinking for yourself????

    • Kangoocar says:

      Should have added, CD@P announced today ( and there is another article on Bernews about this ) that there is a many new IB companies setting up here, and they are the ones that are employing people, and all the plp talking heads are silent on it??? For the sake of all Bermudians, the plp supporters really need to stop their nonsense and be a real part of the solution!!! The race card is getting old now!!! If the plper’s want to stay hungry, that is their problem!!!

      • Same crap different day says:

        “you can’t keep blaming the PLP just like the PLP can’t keep using the race card”

        • Navin Johnson says:

          as long as the cause for the decline is the PLP you can keep blaming them so that people never forget…..they were the direct cause of the decline of Bermuda simple as that… failed policy after another…..14 years of abject failure does not warrant a return to Government

        • hmmm says:

          Yes you can, they put us in this mess.. OH YES THEY DID !!!!
          They are distracting, puffing out chests, causing disruption and angst, divisiveness at every opportunity.

          They think it’s a game. These are peoples lives.

        • serengeti says:

          Oh yes we can keep blaming the PLP. It was their fault entirely.

        • Anon says:

          I agree but I don’t think people are blaming the PLP but more that they are questioning the logic of those that defend them given the possibly irreversible damage they did to the economy. For example, there is no mention in the news about the fact that the PLP suspended funding of the pension plans for a whole year and therefore shouldn’t be criticizing the cuts to pension funding, a problem they actually caused?

        • Truth Teller says:

          Will you stop with the tea party like “race card” talk. Only white racists and blacks who parrot their every comment use the Reagan era term “race card”!!!!

          The victims of racism (black people)do not play the race card…but we know who does.

      • Peter says:

        Kangoocar, sorry to burst your bubble but your many new IB companies are in fact, two small start ups with 2 people running each one.They are not hiring anyone,let alone bermudians.

        I wish it were not true…but it is.

  9. campervan says:

    with news like this and the very real potential that the PLP could regain power next election, my family unit will be keeping our on Island investments liquid and the remainder off shore. Sorry Bermuda, love ya but can’t risk it:(

    • Kangoocar says:

      Totally understand Campervan, and there is many more like us doing the same thing, this is another problem the plper’s don’t understand, there is much needed money sitting elsewhere because it doesn’t trust the plp!!!!

      • js says:

        clearly you don’t understand

        Bermuda has always and will always be an off shore jurisdiction

        i.e. you create wealth outside of Bermuda and move it to Bermuda to avoid income tax liabilities, capital gains tax etc in order to maximize your liquidity levels

        only a fool would do the opposite

        i.e. try to create wealth inside of Bermuda and move it to a jurisdiction were they will be liable for income tax and capital tax liabilities thereby reducing their liquidity levels

        Bermuda is not the place to invest capital and carry significant debt as interest rates are exorbitant and in order to sell off your assets there has to be somebody coming behind you willing to purchase them

        I’m sure people who bought property in the last 20 years will understand that principle

        Bermuda is however a good place to accumulate savings and the only way to accomplish that is to avoid the debt trap

        and clearly the only people who benefit from this economic set up are the old established families who own property with little to no debt

        everybody else is just treading water

        • Anon says:

          I completely disagree that old established families are the only ones that benefit. That’s nothing more than an excuse. Anyone who saves as much as they can to pass it on to the next generation benefits as well. You see this a lot in the Portugese community where money is set aside during years of hard work, in cases manual, in order to buy a house or pass on to their children. The attitude that “no one ever gave me anything so I’m going to spend everything I earn” doesn’t help anyone. Even saving a bit each week and staying out of debt over a few generations makes a huge difference at the end of the day.

          • js says:

            you must either be a real estate agent or a loan officer

            which explains all of the free time you apparently have to reply to more than 5 comments regarding this one article

            • Anon says:

              I wish!

              • js says:

                my apologies

                • Anon says:

                  being a real estate agent has got to be one of the easiest and fastest ways to make $ but they have to be good at it

                  • Contradictory says:

                    I would argue that being a professional athlete is the easiest and fasetest ways to make money but you have to be good at it.

                  • James Herald says:

                    Correction: being a real estate agent WAS one of the easiest ways to make $. That was then. Now it is tough and that is why many estate agents in Bermuda have left the biz.

                    Bermuda real estate is in the toilet, has been for several years, and will be for the forseeable future.

                    One of the main reasons is Bermuda has a finite population and it needs to be increased. PLP supporters are too unaware to see this so are manipulated by the PLP into believing that the OBA is anti Bermudian – and that we need less people here not more. If enough people listen to the PLP – Bermuda will be completely finished. Politics is often reliant on lesser intelligent people – PLP is a perfect example.

                    Yes Im waiting for the cries of racism…. yet you all know its true.

        • Kangoocar says:

          @js, you obviously don’t know what ” keeping liquid means???”

  10. flikel says:

    I really do not understand something.

    When the Bermuda economy was on fire, during the PLP reign, they were often accused of being to liberal with work permits, they seemingly caused the strain on Bermuda’s infrastructure by allowing in too many workers, they were the cause of the sky rocketing rental prices as they did not do much to stop this, the average Bermudian could not find affordable rental accommodation nor could they afford to buy because the PLP overheated or chose not to dampen the economy.

    Now, the same administration, through their liberal work permit policies and through their desire not to be heavy handed in stifling growth…is now accused of chasing people away and causing the economy to crash?

    How can this be? How can you both be liberal with work permits and chase people away at the same time?

    During the PLP, massive and numerous construction projects were initiated. Isn’t this a sign that investors and developers had confidence in the PLP? When the Green family decided to invest in the Princess, this was heralded as a sign of confidence in the OBA (even though they started on their development plans under the PLP government).

    If we want people to come to Bermuda and live, shouldn’t people start be lowering their rental demands, thereby making it more attractive? If you want people to purchase from your store, shouldn’t you start by lowering prices and/or offering better service? It seems we want to blame everything on the PLP. Because I can’t get a tenant to pay my outrageous rent….it’s the PLP’s fault.

  11. Dirk Gentley says:

    Will only be a couple of years until the PLP gets another chance to steer the ship back on course.

    • Anon says:

      … what are you basing that on? Their great previous performance record? Thanks for the laugh

  12. Johnny says:

    In my opinion based on history, the haves will never fight for the have nots.

  13. Poor guy says:

    The PLP are the reason Bermuda is in trouble!

  14. Alvin Williams says:

    Keeping liquid means no matter where you run; you will pay taxes and this time income tax. Unless of course you find another low tax jurisdiction like Bermuda and we all know all low tax jurisdictions are on the hit list;even the world’s favourite-Switzerland.