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Butterfield: S&P has got it wrong on loan losses forecast

A Bermuda bank has challenged the Standard & Poor's Rating Services decision to lower Bermuda's Banking Industry Country Risk Assessment (BICRA) score Butterfield Bank last night expressed optimism in the Bermuda economy and said S&P erred in its forecast of remaining credit losses by Bermuda's banks of some $500 million to $600 million over the next two years.

S&P had made the BICRA adjustment citing revised expectations for full-cycle (2009-2016) cumulative credit losses in the range of $1 billion to $1.2 billion in the banking industry.

The ratings agency expressed its concern in the research report published Monday, in which it downgraded HSBC Bank of Bermuda.

In response, an HSBC statement said: “HSBC does not comment on ratings.”

Butterfield's stand-alone credit ratings were not adjusted in this most recent S&P rating action; the Bank's BBB+/A-2 long- and short-term credit ratings were affirmed.

But Butterfield said yesterday: “Butterfield believes that S&P's forecast of remaining credit losses by Bermuda's banks of some $500 to $600 million over the next two years is an inaccurate figure that is based on industry data that is not correctly segmented.

“The losses incurred by Bermuda's banks stemming from the global financial crisis, noted as being about $600 million (2009 to date) by S&P are based on aggregate industry figures.

“Those losses include write-offs associated with several large non-performing loans on local hotel properties. The industry has largely addressed legacy non-performing hospitality loans and there is no evidence of potential material, near-future losses from this sector.

“The aggregate legacy loss figures used by S&P in their analysis also include losses on underperforming assets that are not directly related to the Bermuda economy. As such, the historic losses do not reflect the current condition of the local economy.

“Butterfield's own provisions for credit losses have been stable for the past three years and have proved adequate. There are no indicators that lead us to believe provisions at this level will not be sufficient in the foreseeable future.

“Butterfield's capital position is very strong with Total and Tier 1 capital ratios of 23.1 percent and 19.8 percent respectively (as at 31 March 2014).

“Whilst there is little doubt that Bermuda's economy has retracted and the country is going through a period of transition, we are optimistic about Bermuda's continued resilience and potential for economic growth.”

Capital ratios measure the amount of a bank's capital in relation to the amount of risk it is taking.

Tier 1 Capital Ratio is a comparison between a banking firm's core equity capital and total risk-weighted assets.

In Monday's review, S&P lowered its long- and short-term issuer credit ratings on HSBC Bank Bermuda to ‘A-/A-2' from ‘A/A-1', with a negative outlook, and removed the ratings from CreditWatch with negative implications, where they had been placed March 11, 2014.

Standard & Poor's affirmed its ‘BBB+/A-2' long- and short-term issuer credit ratings on Bank of N.T. Butterfield & Son Ltd., with a negative outlook.

Butterfield Bank: Disputing S&P's credit losses projection (Photo by Nicola Muirhead)

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Published July 03, 2014 at 9:00 am (Updated July 02, 2014 at 9:21 pm)

Butterfield: S&P has got it wrong on loan losses forecast

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