TEXT-Fitch affirms Bank of N.T. Butterfield & Son at 'A-'
Dec 14 - Fitch Ratings has affirmed Bank of N.T. Butterfield & Son Limited's (BNTB) long-term Issuer Default Ratings (IDR) at 'A-'. The Rating Outlook remains Stable, reflecting the Stable Outlook on Bermuda's foreign currency long-term IDR. Fitch has also placed the Viability Rating (VR) of 'bb+' on Rating Watch Positive. A complete list of ratings is provided at the end of this release. RATING DRIVERS AND SENSITIVITIES - VRs and IDRs The affirmation of BNTB's IDR reflects BNTB's Support Rating Floor of 'A-' due to its systemic importance, and demonstrated support from the Bermudian government given its guarantee on the principal and interest payments of BNTB's outstanding preferred stock. Fitch considers support from the Bermuda government to be extremely high. Although Fitch's view includes a strong probability of support in determining BNTB's IDRs, these ratings could be adversely affected if the willingness and/or capacity of the Bermudian government to support BNTB in the event of need were to change. BNTB's VR reflects its strong market position, liquid balance sheet, good capital levels, and diversified revenue stream (with fee based revenues representing almost 40% of total revenues), offset by significant product concentration in residential lending, geographic concentration in Bermuda and large exposures in its commercial loan portfolio. In placing the VR on Watch Positive, Fitch considered BNTB's overall improving financial profile. Fitch believes BNTB has returned to a sustainable level of profitability after being recapitalized in 2010 following significant losses in its investment securities portfolio. Management has taken multiple strategic initiatives since the recapitalization, including improvements in its risk management profile, and more recently shifting its growth focus on expansion in the UK and Guernsey. Fitch positively views the growth strategy, which is targeted at lending, as well as fee-based products particularly in private wealth and trust services, and considers BNTB's risk management culture to be strong. Although BNTB continues to face asset quality pressures, specifically in its residential loan portfolio, Fitch expects net losses to remain manageable. Fitch notes despite BNTB's non-performing assets (NPAs; inclusive of accruing troubled debt restructurings and foreclosed real estate) remain high at 5.06% as of Sept. 30, 2012, annualized net charge-offs through the third quarter of 2012 (3Q'12) remain relatively low at 18 basis points (bps). Fitch also positively views a reduction in non-performing loans, which have experienced a 37% decrease since 2009. In resolving the Rating Watch on BNTB's VR, Fitch will closely monitor asset quality and earnings trends over the near term. Moderating trends in asset quality, including lower levels of NPAs in absolute terms, would be viewed favorably and could lead to upward momentum in the VR. Additionally, maintaining current levels of return on assets (ROA) would also be viewed positively by Fitch. The company has also invested in its information technology infrastructure which should provide operating efficiencies and cost savings in future periods. Although execution of its strategies is ongoing, Fitch believes these changes should result in BNTB enhancing its interest and fee-based revenue streams from other jurisdictions, and cost-saves. Fitch would consider an upgrade of the VR if BNTB continues to maintain ROA at roughly 75 bps in the short term, absolute levels of NPAs continue to decline, or if the company exits or redeems its government guaranteed preferred stock program while maintaining strong capital levels. Conversely, a downgrade of the VR could occur in the event of significant deterioration of financial performance, a rise in NCOs due to asset quality pressures, and an increase to the risk level of the balance sheet mix. RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING Fitch considers BNTB to be a systemically important institution to the local Bermuda economy and as such considers the level of support from the government to be extremely high. This support was demonstrated by the governments guarantee on the principal and interest payments of BNTB's outstanding preferred stock. Based on the high support level, Fitch has assigned a support rating floor of 'A-'. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt issued by BNTB is notched down from the VR, and the rating of specific issues are typically sensitive to any change in the bank's VR. Preferred stock issued by BNTB is equalized with Bermuda's foreign currency long-term IDR, reflecting the guarantee from the Bermuda Government. Fitch has downgraded the preferred stock issuance to 'AA' from 'AA+' in conjunction with the downgrade of Bermuda's foreign currency long-term IDR to 'AA' from 'AA+' (see release 'Fitch Downgrades Bermuda's Foreign Currency IDR to 'AA'; Outlook Stable' June 26, 2012). BNTB's preferred stock rating is highly sensitive to any changes in the presumed support from the Bermuda Government. As such, any removal of the guarantee on the preferred stock would lead to a multi-notch downgrade in the preferred rating. Fitch has taken the following rating actions: Bank of N.T. Butterfield & Son --Long-term IDR affirmed at 'A-'; Outlook Stable; --Short-term IDR affirmed at 'F1'; --Viability Rating of 'bb+' placed Rating Watch Positive; --Preferred stock downgraded to 'AA' from 'AA+'; --Subordinated debt affirmed at 'BB'; --Support rating affirmed at '1'; --Support Floor affirmed at 'A-'. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Global Financial Institutions Rating Criteria' (Aug. 15, 2012); --'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012); --'Risk Radar' (Oct. 15, 2012); --'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 5, 2012); -- 'Bermuda Full Rating Report' (July 18, 2012). Applicable Criteria and Related Research: Rating FI Subsidiaries and Holding Companies Risk Radar October 2012 Assessing and Rating Bank Subordinated and Hybrid Securities Bermuda Global Financial Institutions Rating Criteria