Bank of Bermuda chief executive officer Philip Butterfield is unconcerned by major local rival Butterfield Bank getting a helping hand from Government to boost its capital base.

The deal which saw Government guarantee the principal and dividends on $200 million worth of preferred shares issued by Butterfield Bank is "what you would expect a responsible Government to do", Mr. Butterfield said yesterday.

While Bank of Bermuda is well capitalised and does not require to raise new capital, its parent group HSBC has had to go to the markets to raise $17.7 billion in a rights issue, having declined the offer of financial support from the UK Government.

As for a competitor getting a boost from the public sector, Mr. Butterfield said he was totally focused on his own bank's operations. "I relish competition and I think time will show that we will more than hold our own," he added.

"I'd rather be part of an organisation that looks to the markets for capital than elsewhere."

He declined to speak on the details of the Butterfield Bank deal, saying he would leave that to the parties involved.

Last week the Bank of Bermuda announced a 21-percent increase in profit for 2008, what Mr. Butterfield described as "one of the most challenging periods in financial services history".

The bank posted net profit of $348 million, compared to $287 million in 2007. Its Bermuda banking business also achieved a 20-percent increase in profits.

Reasons for the success at a time when many banks are struggling merely to survive, included the ability for management to call up for advice from experts based elsewhere in the HSBC group, a conservative investment portfolio and dedicated staff, Mr. Butterfield said.

The bank's $10.3 billion balance sheet saw a four-percent decline last year, but had avoided the kind of devastating write-downs suffered by many financial institutions around the world.

Chief financial officer Nigel Crow said the investment portfolio, valued at around $3.5 billion, had been very conservatively managed since long before the sub-prime mortgage debacle and the credit crisis caused widespread financial devastation.

"The vast majority of our portfolio has a credit rating of AA- or above," Mr. Crow said. "As at the end of 2008, we had suffered no permanent impairment on any one of the holdings we have in the investment portfolio. And we have no underlying securities giving us any reason for undue concern."

Some holdings that had been a cause for concern had already been sold off, he said. He added that the bank held none of the asset-backed securities or collateralised debt obligations that had landed other institutions in trouble by souring with the slump of the US property market.

Deciding what to invest in was a "rigorous" process which took account of rating agencies' ratings, advice from experts within the HSBC group, the bank's own due diligence and "what the markets are telling us".

Chief operating officer Michael Collins said the bank was also in good shape in terms of its core capital. Its Tier 1 capital (shareholders' equity plus retained earnings, minus intangible assets such as goodwill) ratio, as a percentage of risk-weighted assets, was 29 percent at the end of 2008.

The Bermuda Monetary Authority recently conducted stress tests on all of the Island's banks, putting the scenario of a viciously declining economy through computer models and requiring that the banks emerged with a Tier 1 capital ratio of at least six percent. Bank of Bermuda's high ratio ensured it did not need to raise extra capital.

The BMA wants to ensure that all the banks have a sufficiently large "capital buffer" to be able to withstand a brutal downturn, to protect customers and to underpin the continued functioning of the Island's economy.

Mr. Butterfield said the economy had shown no signs of improvement so far this year and added that a recovery may not be apparent until well into next year.

International business would probably go through a period of slow growth and business visitor numbers were likely to fall. Businesses would inevitably look to make efficiencies.

The bank itself had already shrunk some lines of business and displaced some roles and Mr. Butterfield said he expected to see more such moves throughout the financial services sector.

"Jobs are becoming more knowledge-based," Mr. Butterfield said. "We have to make sure that Bermudians have the right skill set to succeed in the 21st century."