Fitch Ratings yesterday downgraded Butterfield Bank's long-term debt rating from A to A-, citing a $121 million charge in the fourth quarter of last year relating to US mortgage-backed securities.

Fitch also affirmed Butterfield's short-term customer deposit rating at the highest level of F1 — which indicates the strongest intrinsic capacity for timely payment of financial commitments over a 13-month period.

Butterfield's support rating was also upgraded from '3' to '1', which indicates that there is an extremely high probability of external support and that the potential provider of support (ie, the Government) is very highly rated in its own right.

Fitch's actions come after Butterfield posted its full-year results last Friday and announced a $200 million, Government-guaranteed capital raise.

In giving its reasons for downgrading Butterfield's long-term issuer default rating (IDR), Fitch said: "During the fourth quarter of 2008, Butterfield announced a sizeable, other-than-temporary impairment (OTTI) charge of $121.2 million due mainly to the volatility in market prices for US mortgage backed securities (MBS) in its held to maturity (HTM) investment portfolio. While this is an accounting charge and does not impact cash, it adversely pressures capital and earnings. In addition, Butterfield has an unrealised loss of $161.7 million against other HTM investments related to US MBS holdings.

"Under HTM accounting, this has not impacted capital or earnings, although it could in the future if determined by OTTI. Subsequently, Butterfield announced the $200 million equity offering discussed above and reduced its common dividend by 75 percent, which will save approximately $47 million annually."

Standard & Poor's announced on Friday that it had raised the Bank's outlook from CreditWatch Negative to CreditWatch Developing and that it expects to affirm the current 'A-' long-term counterparty credit rating following the bank's successful implementation of its capital plan.

The S&P report noted the strength of Butterfield's loan portfolio and the likelihood of good profitability in 2009.

A Butterfield spokesperson said: "We are pleased that S&P recognises the strength of the actions Butterfield has taken to establish an additional capital buffer and that Fitch has raised our support rating and affirmed our short-term credit quality rating.

"The decision to enhance our capital position will provide an additional capital buffer and will help us remain the strong and vital company that we have been for over 150 years."