Fitch Upgrades Butterfield Bank’s Viability Rating
Fitch Ratings has upgraded the Bank of N.T. Butterfield & Son Limited’s Viability Rating [VR] to ‘bbb’ from ‘bbb-’ following its review of the bank. Fitch has also affirmed BNTB’s support-driven Long-Term Issuer Default Rating [IDR] of ‘BBB’. The Rating Outlook remains Stable.
The ratings agency said, “Today’s upgrade reflects BNTB’s demonstrated and sustainable improvement in core profitability, execution of stated strategic objectives, and continued above-average capital levels. The VR also reflects Fitch’s positive view on the company’s liquid balance sheet and strong market position in Bermuda and the Cayman Islands. Conversely, product and geographic concentration in Bermuda and concentration in the loan portfolio constrain the VR.
“Return metrics have improved, reflecting growth in the bank’s fee-based business, positive trends in net interest income, as well as continued decline in non-recurring items. Return on average assets was 1.07% for 2016, which is in line with similarly-rated peers, and up 29bps from the prior year.
“More recently, the company successfully executed on two major initiatives related to its capital structure: a U.S. IPO and diversifying its shareholder investor base. In September 2016, BNTB completed a sale of its common shares on the New York Stock Exchange. BNTB used the proceeds to fully redeem the company’s 8% preferred stock. The company’s preferred stock was issued in 2009 with an unconditional guarantee from the Government of Bermuda.
“The preferred stock issuance was an extraordinary measure of government support and its redemption has resulted in annual savings of $16 million in dividends and guarantee fees. Further, the common share offering improved the bank’s access to capital and provided U.S. secondary market liquidity for BNTB’s largest shareholder, The Carlyle Group, a private equity firm, to exit its 23% position. From a creditor’s perspective, Carlyle’s exit should support a more long-term-oriented investor base, which is more favorable in our view.
“The bank continues to maintain above-average capital levels on a risk-weighted basis, which Fitch views positively and supports the VR at its new level. As of 1Q17, BNTB’s Fitch Core Capital-to-risk weighted assets ratio was 15.9%, up from 13.1% in the prior year period. BNTB’s revenue and loan portfolio are concentrated in Bermuda. As such, Fitch expects BNTB to operate with higher capital than similarly-rated peers.
“Fitch also views balance sheet liquidity as a strength to the rating. The bank operates with a high level of cash and securities at 65% of total assets at 1Q17, and a low loan-to-deposit ratio of 36%.
“BNTB’s product and geographic concentration in Bermuda and concentration in the loan portfolio constrain the VR. The bank’s top 10 commercial lending exposures account for a large percentage of total commercial loans.
“The Government of Bermuda passed resolution legislation in February 2016 that has weakened the sovereign’s propensity to provide support. In Fitch’s view, although the resolution legislation has weakened support, it has not eliminated it. Fitch believes the government continues to maintain a strong willingness to support the country’s banking system because BNTB’s assets are considerable when compared to the size of the Bermudian economy and 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.
“As such, Butterfield’s Support Rating [SR] of ’2′ indicates a ‘high probability’ of external support from the sovereign. The SR corresponds to a Support Rating Floor [SRF] of ‘BBB’, which indicates the minimum level to which BNTB’s Long-Term IDRs could fall if Fitch does not change its view on the potential for sovereign support.
“Subordinated debt issued by BNTB is notched down from the VR in accordance with Fitch’s assessment of each instrument’s respective non-performance and relative loss severity risk profiles.
“Following the upgrade, Fitch envisions limited upward ratings momentum. The rating action incorporates Fitch’s view that BNTB’s earnings performance is sustainable and assumes that current levels of capitalization and liquidity will continue to be maintained. The rating action incorporates the expectation that asset quality should continue to trend around current levels over the Outlook time horizon, with a moderate level of deterioration should economic conditions worsen over the medium-to-longer term.
“While not anticipated at this time, negative rating action could occur if asset quality metrics deteriorate significantly below current levels. Additionally, ratings would be sensitive to increases in risk appetite, for example through rapid growth outside of the bank’s footprint or increased credit or interest rate risk in the securities portfolio.
“The rating action also assumes capital management practices will not lead to deterioration in the bank’s above-average capital levels. Fitch focuses on Fitch Core Capital to risk-weighted assets [FCC/RWA] as its primary measure of capital adequacy. Fitch expects that BNTB’s FCC/RWA ratio will remain above similarly-rated banks. In addition, the VR also incorporates Fitch’s minimum expectation that BNTB’s tangible common equity position as measured by its TCE/TA ratio should remain above 5%. BNTB’s TCE/TA ratio was 6.2% as of 1Q17, above Fitch’s expectations and the 6% minimum target set by BNTB management.
“While Fitch does not expect further downward revisions to the SR and SRF, the ratings could be sensitive to changes regarding the ability of the sovereign to provide support [e.g. deterioration in financial flexibility] and/or the propensity of the sovereign to provide support [e.g. bail-in and/or regulations that could further lower the probability of support].”
