Fitch Affirms Bank of N.T. Butterfield & Son Ltd.'s Rating; Outlook Negative
KEY RATING DRIVERS
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmations of BNTB's IDR, Support Rating (SR) and Support Floor Rating (SRF) reflect its systemic importance to the local economy, as well as demonstrated support from the Bermudian government in the past, namely the 2009 guarantee on the principal and interest payments of BNTB's preferred stock. The preferred stock rating would be unaffected by any changes to BNTB's SR or SRF as it is based off of sovereign support.
The Negative Outlook reflects Fitch's evolving view of support from Bermuda. Fitch considers Bermuda to be a Path 2 country, defined as one in which there is a weakening of sovereign support of the banking sector.
The Bermuda Monetary Authority's (BMA) proposal regarding a statutory framework for a special resolution regime for banks licensed in Bermuda embeds many of the provisions of the UK Banking Act 2009, according to the BMA. It proposes to provide the authorities with the necessary stabilization powers to transfer part or all of a failing bank's business to a private sector purchaser, assume control of part or all of a failing bank's business through a bridge bank, and acquire temporary public ownership of a bank where required. The proposed framework suggests a weakening of support for the financial sector over time, in Fitch's view].
VR
Fitch's affirmation of BNTB's VRs incorporates the view that the tangible common equity position measured by the TCE/TA ratio would remain above 5%. Further, Fitch believes the company will continue to build its capital position getting back to its normalized ranges by 2016. Should these factors change, ratings could be pressured.
Additionally, 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.
BNTB's VR could see positive momentum should the company's demonstrate sustainable core profitability improvement while materially reducing its non-performing loans. Although capital measures are high and will come down, Fitch would expect BNTB to continue to operate with above average capital position.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt issued by BNTB is notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.
PREFERRED STOCK
Preferred stock issued by BNTB is equalized with Bermuda's foreign currency Long-term IDR, reflecting the guarantee from the Bermuda Government. The Ministry of Finance agreed to guarantee the principal and dividends on BNTB's preferred stock when it was issued in 2009.
RATING SENSITIVITIES
IDRS
BTNB's IDR is sensitive to changes in the SRF as the IDR is at its SRF. Fitch adopts a 'higher of' approach in assigning Long-term IDRs to financial institutions, taking the higher of the SRF and the standalone financial strength (as reflected in the Viability Rating (VR) of 'bbb-' for BTNB). In this case, BTNB's IDR relies on the SRF of 'A-'. If the SR is downgraded and therefore the SRF is revised, BTNB's IDR would be vulnerable to a downgrade to as low as its VR of 'bbb-'.
SUPPORT RATING AND SUPPORT RATING FLOOR
BNTB's SR of '1' reflects Fitch's opinion that BNTB is a systemically important institution for Bermuda, as it represents approximately 40% of total banking assets in the country. Fitch will also assess the government's ability to support BNTB and potentially revise the SRF if the sovereign's rating were downgraded by more than one notch.SR could be sensitive to changes in Fitch's view regarding the ability of the sovereign to provide given the weakening fiscal position of the sovereign.
As a Path 2 country, SRF revisions for systemically important banks are likely initially to be up to one rating category (e.g. a SRF in the 'A' range could fall into the 'BBB' range), while SRF revisions for mid-sized or small banks could be greater, potentially as far as 'No Floor'. Fitch considers BNTB to a systemically important institution to Bermuda, as it represents approximately 40% of banking assets.
VR
Fitch's affirmation of BNTB's VRs incorporates the view that the tangible common equity position measured by the TCE/TA ratio would remain above 5%. Further, Fitch believes the company will continue to build its capital position getting back to its normalized ranges by 2016. Should these factors change, ratings could be pressured.
Additionally, 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.
BNTB's VR could see positive momentum should the company's demonstrate sustainable core profitability improvement while materially reducing its non-performing loans. Although capital measures are high and will come down, Fitch would expect BNTB to continue to operate with above average capital position.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated rating is typically sensitive to any change in the bank's VR as well as broadly sensitive to the same considerations that might affect its VR].
PREFERRED STOCK
BNTB's preferred stock rating is highly sensitive to any changes in the ability of the Bermuda government to fulfill its obligation. A downgrade in the sovereign rating of Bermuda would trigger a commensurate downgrade of the preferred stock
Fitch affirms the following ratings:
Bank of N.T. Butterfield & Son
--Long-term IDR at 'A-'; Outlook Negative;
--Short-term IDR at 'F1';
--Viability Rating at 'bbb-' ;
--Preferred stock at 'A+';
--Subordinated debt at 'BB+'
--Support rating at '1';
--Support Floor at 'A-'.
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