Moody's downgrades BCB due to 'increased risk' (Update 1)

FRIDAY, AUGUST 3: Bermuda Commercial Bank was downgraded by Moody’s Investors Service on Thursday due to “increased risk” in BCB’s asset base.

It said even though the bank’s capital position and liquidity are “quite healthy” its securities portfolio could lead “to unexpected losses that could materially reduce its capital base and undermine confidence in the bank.”

The bank issued a statement saying it was disappointment with the downgrade.

Moody's downgraded BCB’s ratings, including long-term deposits to Ba2 from Baa3, short-term obligations to Not Prime from Prime-3, and the standalone bank financial strength/baseline credit assessment to D/ba2 from D+/baa3. The rating outlook is now stable.

The downgrade reflects the increased risk that BCB has taken in its asset base.

Moody’s said in a release: “In particular, BCB has built, in a fairly rapid manner, a significant concentration in a portfolio of securities with higher risk than its traditional investments. Moody's believes that this resulted from both its changed ownership and risk appetite, as well as pressure on profitability because of the protracted low interest rate environment.

“Specifically, the investment portfolio has grown from 5 per cent of total assets at March 31, 2010 to 45 per cent of total assets at March 31, 2012, and was approximately three times tangible common equity at this date.

“As well, a sizeable portion of this portfolio is invested in equities and unrated or non-investment grade rated debt securities that provide current revenue and income benefits in excess of BCB's historical, conservative investments, but that also expose the firm to considerable risks.

“BCB's capital position and liquidity pool are currently quite healthy. However, its securities portfolio concentration could lead to unexpected losses that could materially reduce its capital base and undermine confidence in the bank.

“The downgrade also incorporates Moody's view of the firm's risk governance challenges that result from its ownership by Permanent Investment Limited (Permanent), as well as the management of its investment portfolio by ICM Limited, a minority shareholder with ties to Permanent.

“In Moody's opinion, this heightens risk that the bank could take on additional risks to generate higher returns on capital.

“Moody's outlook on BCB is stable at its new rating level, incorporating the asset and governance risks of the firm as well as its solid capital and liquidity positions.

Moody's last rating action on Bermuda Commercial Bank Limited was on May 30, 2012 when Moody's placed all ratings of Bermuda Commercial Bank Limited on review for downgrade.”

Horst E. Finkbeiner, director and COO commented said: “While disappointed with the downgrade we are pleased that our solid capital position and strong liquidity were recognized by Moody’s. We remain satisfied with the overall growth in our business and the performance of our portfolio”.

BCB is the only bank in Bermuda focused purely on private wealth and corporate clients, providing banking, trust, asset and investment management, and corporate administration & services. In October 2011 BCB acquired Paragon Trust Company Limited and Charter Corporate Services Limited, expanding the bank’s business, diversifying its revenue stream and strengthening its trust and corporate services.

Mr Finkbeiner said: “In March 2012 we published our half-year figures that showed that our balance sheet has strengthened year on year with shareholder equity at $93.56m (see graph). Our profits have also improved, with earnings per share more than doubling from $0.20 per share in 2011, to $0.44 per share at half-year 2012. We are very pleased with the steady growth in our business franchise and our robust balance sheet”.

“The change in our rating is driven by the challenges in the global banking environment, particularly in Europe and with markets in general. This is something that the Bank is managing closely and we have taken note of Moody’s comments on our investment portfolio. While our portfolio is well diversified and controlled we will continue to work with our investment advisor to monitor and reduce any concentration or exposure to the areas highlighted by Moody’s."

The bank said it follows a conservative approach to managing its balance sheet, and at half-year 2012 had a Tier 1 capital ratio of 25.52%. Further over 50 per cent of its assets are in cash and cash equivalents with no direct exposure to the troubled mortgage business.

Mr Finkbeiner added: “We are pleased with our strong capital and liquidity position, and we look forward to continuing to grow our business in 2013”.