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Fitch: Butterfield’s loan losses ‘remain manageable’

Fitch yesterday affirmed and raised its ratings on Butterfield, but said the bank continues to face pressures in its residential loan portfolio. However, Fitch said it expects net losses in that portfolio to “remain manageable”.

Stating that it considers support from the Bermuda Government for Butterfield to be “extremely high”, Fitch upgraded the bank’s stand-alone viability rating to bbb- from bb+ and affirmed Butterfield’s long-term issuer default rating at A- and retained its stable outlook.

Fitch said the overall rating of A- was consistent with the equivalent ratings of the other two major rating agencies.

Commenting on the increase in the viability rating, Butterfield stated that the Fitch report noted the bank’s strong market position, liquid balance sheet, good capital levels, and diversified revenue stream, with fee-based revenues representing almost 40 percent of total revenues.

Brendan McDonagh, Butterfield’s chairman and chief executive officer, said in a statement, “It is pleasing that Fitch has recognised the strength of Butterfield’s balance sheet in affirming the Bank’s credit ratings and raising its viability rating. This reflects the intrinsic creditworthiness of the Bank and the effectiveness of our current risk management, financial management and corporate governance approach.”

The rating affirmations and changes follow Fitch’s downgrade of Bermuda on June 7, but the bank said their issuer default rating and outlook were unaffected by that downgrade.

Commenting on the bank’s loan portfolio, Fitch said: “Although BNTB continues to face asset quality pressures, specifically in its residential loan portfolio, Fitch expects net losses to remain manageable.

“Despite BNTB's non-performing assets (NPAs; inclusive of accruing troubled debt restructurings and foreclosed real estate) remain high at 4.05 percent as of March 31, 2013, average 5Q NCOs remain extremely low at 26 basis points (bps).

The affirmation of the bank’s ratings is “due to its systemic importance to the local economy, as well as demonstrated support from the Bermudian Government given its guarantee on the principal and interest payments of BNTB's outstanding preferred stock”, Fitch said.

“Additionally, Bermuda also owns an equity stake in BNTB through a sovereign pension fund. Given these factors, Fitch considers support from the Bermuda Government to be extremely high. 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's IDRs on Bermuda are a reflection of the Government's ability to support BNTB. Despite its Negative Outlook on the Bermuda sovereign, Fitch's Outlook on BNTB's IDR remains Stable on the basis that even if the sovereign's ratings were downgraded by another notch, Fitch could maintain the SRF at its current level. This is based on Fitch's belief that the government's propensity and ability to support BNTB, if necessary, would remain intact.”

Fitch continued: “Fitch would assess the government's ability to support BNTB and potentially revise the SRF if the sovereign's rating were downgraded by more than one notch. Preferred stock issued by BNTB is equalised with Bermuda's foreign currency long-term IDR, reflecting the guarantee from the Bermuda Government.

“Fitch has downgraded the preferred stock issuance to 'AA-' from 'AA' following the sovereign ratings downgrade. BNTB's preferred stock rating is highly sensitive to any changes in the ability of the Bermuda Government to fulfil its obligation.”

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Published June 12, 2013 at 9:00 am (Updated June 11, 2013 at 7:45 pm)

Fitch: Butterfield’s loan losses ‘remain manageable’

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