HSBC Bermuda and Butterfield Bank responded yesterday to a ratings cut by Standard & Poor’s, which was concerned about high unemployment, a prolonged real estate downturn and thousands of expatriates leaving the Island.However, Butterfield said in a statement that S & P had noted that Butterfield “ … has performed better than its local bank peers over the past two years in terms of loan performance” and the agency raised its assessment of Butterfield’s risk position to “adequate” from “moderate”.”Brendan McDonagh, Butterfield’s chairman and CEO added: “Despite ongoing economic difficulties in Bermuda, Butterfield’s profitability continues to improve, contributing to our capital strength.““Our Total and Tier 1 regulatory capital ratios of 22.6% and 18.4%, respectively, remain very strong compared to our peers and well in excess of regulatory minimums.”A spokesperson for HSBC Bermuda said in a brief statement last night: “Overall, this was an expected result given Bermuda’s anchor rating was similarly lowered by one notch, and in light of continued difficult economic and trading conditions.”The S & P report said HSBC BB had “performed substantially worse than its local bank peers over the past two years in terms of loan performance, in our view”.Furthermore, S & P stated: “We expect that nonperforming loans and credit losses could increase somewhat further given local economic trends. For example, nonperforming loans (including restructured loans) increased to more than 15% as of December 31, 2012, by our calculation, from less than 10% as of December 31, 2010.“We think deterioration in hospitality, commercial, and residential mortgage loans are largely responsible. We expect additional weakness within these loan portfolios in part because of the weak Bermudian economy and many residential mortgage borrowers’ lower rental income. We also think there could besignificant losses realised within the hospitality and construction loan portfolio over the next few years.”S & P is concerned the island could see unemployment as high as 14 percent by the end of 2014.And it said in aggregate, it estimated that the Bermudian banking sector is less than half way through our full-cycle loan-loss projection of $450 million to $500 million by year-end 2015.S & P lowered the ratings on HSBC Bermuda to ‘A from ‘A+ and on Butterfield by one notch to BBB+ from A-.S & P said it had lowered its assessment of Bermuda’s economic risk, and it assessthe trend for economic risks as negative in Bermuda, “reflecting our view that there is at least a one-in-three chance that economic risks coulddeteriorate further”.The agency said: “The Bermudian economy is in a ‘correction phase’, in our view, and Bermudian banks’ credit losses have totalled nearly $220 million from 2010 through 2012 (roughly 2.5% of total loans).”Nevertheless, S & P said: “We view the trend for industry risk as stable because Bermudian banks have a high and stable core customer deposit base and have relatively low rivalry given the high concentration of banks.“Furthermore, although Bermudian banks are concentrated by region, they are well diversified by business lines — which include private-banking, asset-management, and personal-trust services. As aresult, noninterest income is a fairly large portion of total revenue for Bermuda’s banks.”