Fitch Affirms Bank Of Butterfield’s Viability Rating
Fitch Ratings has affirmed Bank of N.T. Butterfield & Son Limited‘s [BNTB] viability rating [VR] at ‘bbb-’, and downgraded BNTB’s support-driven Long-Term Issuer Default Rating [IDR] to ‘BBB’ from ‘A-’. The Rating Outlook is Stable.
A statement from the ratings agency said, “The downgrade of the IDR reflects Fitch’s view of weakened sovereign propensity to provide support given that the Government of Bermuda passed resolution legislation through Parliament in the first quarter. The Outlook for BNTB’s IDRs was Negative prior to today’s downgrade.
“BNTB’s VR reflects Fitch’s positive view on the company’s strong market position, liquid balance sheet, and solid capital levels. Tempering these positives are the company’s modest earnings profile, product and geographic concentration in Bermuda residential lending, and some lumpiness in the commercial loan portfolio.
“BNTB’s credit performance, which was previously a negative driver, has improved as nonperforming loans have continued to trend down and charge-offs have remained low. Although nonperforming loans remain higher than similarly rated peers and when compared to Fitch rated U.S. community banks, nonperforming loans remain within normal ranges from a global perspective.
“BNTB has operated with above-average liquidity on its balance sheet as evidenced by its low loan-to-deposit ratio, which has averaged about 51% over the last five years. Fitch views balance sheet liquidity as a strength to the rating. Further, the company has strong capital ratios, which support its risk profile. BNTB’s Fitch Core Capital/RWA ratio has averaged about 14% over the last five years, which is in line with expectations for the current rating level.
“Although BNTB will continue 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 3.3% as of 1Q16, net chargeoffs [NCOs] to average loans remain extremely low at 24 basis points [bps].
“BNTB’s earnings profile is modest, but improving as the company builds out its fee-based businesses, cost cutting initiatives gain traction, and as non-recurring items roll off. As such, Fitch expects earnings and profitability measures to improve in the near to medium term.
“Nonetheless, Fitch recognizes on a risk-weighted assets basis, the company’s earnings profile compares favorably. Financial returns reflect the company’s liquid balance sheet structure where loans make up only 40% of the asset base and the company carries a large amount of low yielding cash & cash equivalents totaling $2.2 billion as of 1Q16.
“Fitch’s downgrade of Butterfield’s IDR reflects the agency’s view of the sovereign’s weakened propensity to provide support given the passage of the Banking [Special Resolution Regime] Act 2016 through Parliament in February. The Act provides regulatory 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 sovereign’s weakened propensity to provide support is reflected in Fitch’s revision of Butterfield’s Support Rating [SR] to ’2′ which indicates a ‘high probability’ of external support from ’1′ which indicates an ‘extremely high probability’ of external support. This revision corresponds to a lower Support Rating Floor [SRF] of ‘BBB’. SRFs indicate the minimum level to which an entity’s Long-Term IDRs could fall if Fitch does not change its view on potential sovereign support.
“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 Viability Rating [VR] of ‘bbb-’. Since the SRF was revised to ‘BBB’ from ‘A-’, BTNB’s IDR was downgraded to ‘BBB’.
“Although legislative developments in Bermuda have led to a degree of weakening in propensity to provide support, they have not eliminated it. In Fitch’s view, the government continues to maintain a strong willingness to support the country’s banking system, particularly as BNTB’s assets and loan book are considerable when compared to the size of the Bermudan economy [BNTB assets are about 2x GDP while loans are about 70% of GDP] and as contagion risk is high. A failure of a major bank could lead to rapid disruption across the financial services sector and spread to the wider economy.
“In contrast, from a global perspective, sovereign willingness to support systemically important banks has weakened significantly since the financial crisis. In response, Fitch has effectively removed the assumption of sovereign support from most bank ratings. This has caused SRs to be revised to ’5′ which indicates ‘support cannot be relied on’, SRFs to be revised to their lowest level of ‘No Floor’ and bank IDRs to be downgraded to the level of their standalone financial strength.”
This rating shows Fitch ringing a tiny little warning bell about the ‘sovereign’. It should not slip by un-noticed. For BNTB it is a small downshift.