TEXT-Fitch affirms Bank of N.T. Butterfield & Son at 'A-'

Fri Dec 14, 2012 11:10am EST

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
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