Turn around: Fitch believes BNTB has returned to a sustainable level of profitability after being recapitalized in 2010 following significant losses in its investment securities portfolio. *File photo
Turn around: Fitch believes BNTB has returned to a sustainable level of profitability after being recapitalized in 2010 following significant losses in its investment securities portfolio. *File photo
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FRIDAY, MAY 11: Fitch Ratings has affirmed the Bank of NT Butterfield’s rating but added an upgrade could be on the cards if it maintains its current return on assets.

The ratings agency said even though Butterfield faces some asset quality pressures, it remains manageable.

Fitch affirmed Butterfield’s long-term Issuer Default Ratings (IDR) at ‘A-’ and Viability Rating  at ‘bb+’. It said the Rating Outlook remains Stable.

Brad Kopp, Butterfield’s president and CEO, said: “We are pleased that Fitch has affirmed our short-term and long-term ratings, which reflect our strong capital position, revenue diversity and return to sustainable profitability. Their statement views favourably our strategic focus on growth through the alignment of resources to core businesses.”

Butterfield reported net income of $40.5 million in 2011 and $14.7 million for the first quarter of 2012. It announced this week it was selling it Barbados banking interests for $45m.

Fitch’s statement

The affirmation of BNTB’s IDR reflects BNTB’s Support Rating Floor of ‘A-’ due to its systemic importance, and demonstrated support from the Bermudian government given its guarantee on the principal and interest payments of BNTB’s outstanding preferred stock.

The affirmation of BNTB’s Viability Rating reflects its liquid balance sheet, strong capital levels, diversified revenue stream and return to profitability, offset by significant product concentration in residential lending and geographic concentration in Bermuda.

Further, given BNTB’s market position, the company has some large exposures in its commercial loan portfolio.

Macro indicators reflect that Bermuda’s economy has been contracting, unemployment levels remain high and the housing market has experienced price depreciation with an expected decline for 2012.

Although the company is facing some asset quality pressures, Fitch believes that the level of net losses from its loan portfolios should remain manageable. Fitch notes that BNTB’s non-performing assets (NPAs) remain high at 3.46 per cent for year-end 2011 compared to the company’s normalized levels of NPAs, which is typically below 1 per cent.

Nonetheless, the elevated level of non-performers has not translated into heavy losses as net charge-offs (NCOs; as calculated by Fitch) remain relatively low at 47 basis points (bps) for year-end 2011.

Fitch believes BNTB has returned to a sustainable level of profitability after being recapitalized in 2010 following significant losses in its investment securities portfolio.

More recently, management has divested non-core business lines and subsidiaries, while shifting its focus on expansion in the UK and Guernsey to clients with ties to Bermuda.

The company has also invested in its information technology infrastructure which should provide operating efficiencies and cost savings in future periods.

Positive

Although execution of its strategies is ongoing, Fitch positively views these changes, which should result in BNTB reducing concentration risks, enhancements to interest and fee-based revenue streams from other jurisdictions, and cost-saves.

Although Fitch’s view includes a strong probability of support in determining BNTB’s IDRs, these ratings could be adversely affected if the willingness and/or capacity of the Bermudian government to support BNTB in the event of need were to change.

Fitch would consider an upgrade of the VR if BNTB improves and maintains its return on assets at roughly 75 base points in the medium term, exits or redeems its government guaranteed preferred stock programme while maintaining strong capital levels.

Conversely, a downgrade of the VR could occur in the event of significant deterioration of financial performance, a rise in NCOs due to asset quality pressures, and an increase to the risk level of the balance sheet mix.

In keeping with Media Council protocol in transparency, Don Burgess is a shareholder in the Bank of Butterfield.

How the Bank of NT Butterfield & Son stacks up-

Long-term IDR at ‘A-’;
Short-term IDR at ‘F1’;
Viability Rating at ‘bb+’
Preferred stock at ‘AA+’;
Subordinated debt at ‘BB’;
Support rating at ‘1’;
Support Floor at ‘A-’.