Fitch downgrades BCB ratings
Ratings agency Fitch has downgraded Bermuda Commercial Bank.
Fitch said the move reflected an increase in BCB's risk profile and weakened capital position in the wake of a shift in the business mix.
The bank's long-term issuer default ratings has gone from BBB- to BB+, while the short-term issuer default rating has dropped from F3 to B.
And the viability rating has been reduced to bb+ from bbb-.
The Fitch report said: “Prior to the downgrade, Fitch saw BCB's liquid balance sheet and strong capital position as a buffer in support of the relatively high risk tolerance of BCB's investment profile.”
Fitch said that BCB's purchase of a majority 75.5 per cent holding in Private & Commercial Finance Group, a UK company that supplies auto and other asset-based financing to consumers and small businesses, was a positive due to diversification of the bank's business model and the “relatively stable income stream” generated by PCFG.
But the Fitch report added: “However, these factors are more than offset by the capital dilution, as a percentage of risk-weighted assets and the riskier overall BCB asset mix that resulted from the acquisition.” Fitch added that the acquisition of PCFG last year had been accompanied by a sell-off of BCB's stake in Bermudian property development firm West Hamilton Holdings Ltd.
And the report said: “While the WHH divestment reduced liquid property holdings by $19.4 million, the PCFG acquisition added $163 million of consumer and business finance loans to the balance sheet that comprised 21 per cent of the BCB's total assets at full year end 2015.
“Fitch views the addition of these loans as an increase in BCB's overall risk profile and risk tolerance.”
The Fitch statement added: “Fitch anticipates headwinds for BCB as a result of volatility within its investment portfolio.
“While BCB continues to perform well in 2015, reporting net income of $8 million, a 7.2 per cent return on equity, Fitch notes that over the last few years BCB's earnings profile has relied on capital gains from the investment portfolio to bolster earnings.
“Recent market volatility and a slump in the oil price are expected to strain the value of some of the securities in the BCB investment profile.”
Fitch added that regular changes at the top of the bank had also affected its rating.
The report said: “While the overall quality of management remains good, Fitch notes that BCB has experienced significant turnover of the CEO role in recent years that also constrains the rating.
“Despite management efforts to restore profitability of the core banking, trust and corporate services segments, performance remains lacklustre. Notably, the PCFG acquisition should be a positive contributor to earnings.”