Bermuda's biggest banks have been given a vote of confidence by a firm respected for its independent assessments of financial strength, despite the Island's limited economic activity giving rise to some concern.

Standard & Poor's, the New York-based ratings firm that assesses the financial strength of public and private sector entities around the world, on Monday assigned the Island's largest bank, the Bank of Bermuda, an 'A+/A-1' counterparty credit rating.

This is the bank's first rating since being taken over by multinational banking giant HSBC Plc in 2004. S&P said the rating was testament to the bank's strong capacity to meet its financial commitments.

The rating, which had been requested by the bank, is likely to give customers peace of mind that the institution's financial strength has been assessed by an outside body.

Also in recent weeks, Bermuda's No. 2 bank, Butterfield Bank, won a positive outlook for its 'A-/A-2' counterparty credit rating from S&P, indicating its position is viewed as favourable enough to put the rating in line for possible upgrade.

The rating indicates Butterfield faces some susceptibility to changes in circumstances and economic conditions, but its overall economic picture is generally satisfactory.

Bermuda also counts two more banks: Privately-held bank, Capital G Bank, and Bermuda Commercial Bank, an institution that doesn't offer retail services.

The Bank of Bermuda had $11 billion in assets at the end of last year, while Butterfield Bank's assets grew to $9.2 billion for the same period, including its operations in the UK and Caribbean.

S&P said its ratings on both banks were viewed with some caution because of being based on a small island.

"Tampering the ratings is Bermuda's limited economy that is both small and highly concentrated around financial services and tourism, and the fact the island does not have a lender of last resort," said S&P's statement on the Bank of Bermuda.

It added that HSBC could fill the lender of last resort role for the Bank of Bermuda, if necessary.

The Bank of Bermuda, prior to its 2004 sale, was rated by S&P, Moody's and Fitch but hasn't been rated in the period since it became part of the HSBC network.

Not all HSBC subsidiaries seek a credit rating. A spokeswoman said Bank of Bermuda felt having a rating would be well received by its customer base.

"The ratings on Bank of Bermuda reflect its leading position within the Bermuda banking market," said credit analyst Laurence Wattraint, attributing this to the bank's ability to be the dominant financial institution serving the Island's more than 1,000 captive insurers, as well as an ability to generate solid fee business from insurance, custody, asset management and investment services.

And S&P said the strong rating was supported by the "extensive managerial and financial support from Bank of Bermuda's parent, HSBC" and that the bank was "strategically important" to its parent. S&P said Butterfield's rating was assigned a positive outlook because of its "solid positions" in Bermuda's and the Cayman Island's commercial banking markets, as well as its reputation in asset management and in servicing investment funds, including a burgeoning hedge fund market.

A "rapidly growing" commercial loan portfolio, and the issues around being based on a small Island, which S&P said limited portfolio diversification, detract from the bank's otherwise rosy prospects.

The need for a powerful IT system to control the group's risks also weighs on the bank, S&P said.

S&P said Butterfield's expanding international fee-based business and low credit costs were important contributors to its profitability.

And while it said its efficiency ratio, measuring at 66 percent, was on the high side, it was considered adequate given the bank's service orientation and decentralised operations.

The Bank of Bermuda, when it was a stand-alone operation, had an efficiency ratio measuring 72.2 percent.

An efficiency ratio measures how much is spent out in operating expenses to generate earnings, and the lower the ratio the better.

The bank's efficiency ratio under HSBC improved to 63.43 percent last year.

S&P recognised Bank of Bermuda's improving operating performance, and said if its track record continued, or if HSBC were to be upgraded, that could bode well for the bank's rating.

"Conversely, if Bank of Bermuda exhibits structural declines in earnings quality, the outlook could be revised to stable," it said.