The Bank of Butterfield received a blow yesterday when Moody's Investor Services changed its ratings outlook on the Island's second largest bank from positive to stable.

The service said the change was made because the bank had not made meaningful improvements to its risk-adjusted core profitability even though it had shown good net income growth.

But last night the bank's executive vice-president and chief financial officer Richard Ferrett remained upbeat.

He said the rating change was "disappointing" but should be seen in the context of the current economic environment. Global stock markets had taken a tumble, with interest rates coming down, and many financial institutions had suffered.

"I think in the present environment to get a stable rating is quite positive."

In its report, Moody's highlighted that Butterfield had retreated from non-core businesses, and had lowered its non-franchise lending exposures.

"Moody's noted, however, that while it recognises the efforts made to improve asset quality, the bank's core loan portfolio contains some sizeable exposures, which could place a drain on profitability if they were to become problematic.

"The agency added that non-performing assets have increased over the past 18 months, largely reflecting a weaker local economy."

Moody's statement said the bank "is highly capitalised and the balance sheet is dominated by liquid assets".

"However, the agency pointed out that there is no support mechanism in place for the Bermudian banks given the lack of a true lender of last resort."

Moody's raised the bank's outlook from stable to positive in November, 2000.

In November, 2002, the bank reported record earnings of $82.289 million. Total income rose from $191.98 million to $223.57 million as total fee and other income rose while net interest income remained flat and total expenses rose from $124.75 million to $142.17 million.

The bank's net income has steadily improved over the past five years, according to its annual report, with cash deposits at banks soaring to $2 billion in 2002.

Investments, meanwhile, have been basically flat at $1.8 billion for the last three years and loans increased to $1.69 billion in 2002 from $145 billion in 2001.

In the first half of the 2003 financial year, the bank reported net income of $34.7 million, up 4.6 percent on the same period a year earlier.

For the second quarter, the bank increased net interest income by $3 million to $28.3 million, a rise of 12 percent despite the low interest environments in the US and the UK. Mr. Ferrett was pleased Moody's had noted the bank's impressive net income growth. Over the last two and a half years the bank's financial performance had gone from strength to strength.

"While we are disappointed we haven't been upgraded, we are very satisfied with our financial performance."

Mr. Ferrett said many factors were beyond the bank's control, such as the wild fluctuations on the world's stock markets.

"Issues outside our control are affecting the local economy."

Mr. Ferrett said Moody's assessment was based on the perspective of outsiders looking at Bermuda and the local economy, rather than as an entity within the Island.

"They have made a judgement sitting in New York."