Fitch Ratings has affirmed Bank of N.T. Butterfield & Son Limited's (BNTB) long-term Issuer Default Ratings (IDR) at 'A-' and Viability Rating (VR) at 'bb+'. The Rating Outlook remains Stable. 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. A complete list of ratings is provided at the end of this release.
The affirmation of BNTB's VR 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% for year-end 2011 compared to the company's normalized levels of NPAs, which is typically below 1%. 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. 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 (ROA) at roughly 75 bps in the medium term, exits or redeems its government guaranteed preferred stock program 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.
BNTB is the leading local bank in Bermuda with total assets of just under $9 billion. BNTB's core strategy is to provide community banking services in Bermuda, Barbados and Cayman as well as wealth management services including asset management, private banking and trust services. Assets under management totaled $5.6 billion, while Trust Assets under Administration were $40.7 billion and Custody & Other Assets under administration were $31 billion.
Fitch affirms the following ratings as indicated:
Bank of N.T. Butterfield & Son
--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-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);
--'Fitch Core Capital: The Primary Measure of Bank Capitalisation' (Jan. 19, 2012);
--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Fitch Core Capital: The Primary Measure of Bank Capitalisation
Rating Bank Regulatory Capital and Similar Securities
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