Fitch Affirms BNTB's Ratings Following Capital Plans

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Long-Term IDR and Viability Ratings (VR) for Bank of N.T. Butterfield & Son Limited (BNTB). A full list of rating actions follows at the end of this press release.

BNTB has announced its intent to repurchase its common shares from CIBC for about $120 million along with the Carlyle Group, which will repurchase an additional $35 million. Fitch has affirmed all ratings following the announcement due to the view that although capital position has declined, it remains reasonable for VR rating of 'bbb-' and the risk on the balance sheet.

KEY RATING DRIVERS - VRs

Today's affirmation of BNTB's ratings reflects Fitch view that although capital is expected to decline after the announced transaction closes, Fitch believes pro-forma capital measures remain appropriate and in-line with current expectations at a VR rating of 'bbb-'. Fitch notes that pro-forma risk-adjusted capital ratios are still solid at CET1 of 10.5% and Total Capital of 16.7%. BNTB's Fitch Core Capital/RWA ratio averaged 11.4% for the last five years.

While BNTB's pro-forma TCE ratio is expected to decrease by 100 bps to about 5.5% when the transaction closes, Fitch believes it remains acceptable given BNTB's balance sheet mix and credit profile. Historically, BNTB has operated with above-average balance sheet liquidity evidenced by its low loan-to-deposit ratio averaging 53.7% over the last five years.

Further, BNTB's credit performance has continued to improve, evidenced by a decline in NPAs (inclusive of accruing troubled debt restructurings and foreclosed real estate) to 3.22% for 4Q'14 compared to 3.90% in 4Q'13 and 4.14% in 4Q'12. During 4Q'14, the NPA figure is also affected by the HSBC Cayman acquisition. Despite higher than average NPAs compared to U.S. community banks, NCOs have remained very low at 0.32% for 4Q'14, 0.45% for 4Q'13, and 0.35% for 4Q'12.

More recently, BNTB's problems loans mix has shifted from commercial to residential mortgages. Although BNTB could face some asset quality pressures, specifically in its residential loan portfolio, Fitch expects net losses to remain manageable. Fitch believes the loss content from the residential loans would likely be less versus its commercial exposure. Additionally, BNTB's residential portfolio has additional cushion given its LTVs at origination on average were 80%. Given the improvements noted in asset quality, Fitch believes the company is in a good position to continue to build capital as credit costs should remain relatively manageable.

BNTB's VR also reflects its strong market position, liquid balance sheet, and good risk-weighted capital levels, offset by modest earnings measures, significant product concentration in residential lending, geographic concentration in Bermuda and large exposures in its commercial loan portfolio.

Over the last two years, BNTB's earnings have improved with return on assets (ROA) and net interest margins (NIM) reflecting a positive trend. Most of the improvement was supported by increased net interest income due to investment revenue yields rising and good growth in fee revenues, while expenses have been relatively flat. Fitch notes that earnings measure remain in line with similarly VR 'bbb-' rated peers.

RATING SENSITIVITIES - VRs

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 demonstrate sustainable core profitability improvement while materially reducing its non-performing loans. Although capital measures are very high and may come down, Fitch would expect BNTB to continue to operate with above-average capital position.

KEY RATING DRIVERS - IDR, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)

The affirmations of BNTB's IDR, SR and 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 of 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.

RATING SENSITIVITIES - IDR, SUPPORT RATING AND SUPPORT RATING FLOOR

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 VR of 'bbb-' for BTNB). In this case, BTNB's IDR relies on the SRF of 'A-'. If the SRF is downgraded, BTNB's IDR would be vulnerable to a downgrade to as low as its VR of 'bbb-'.

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 be a systemically important institution to Bermuda, as it represents approximately 40% of banking assets.

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. The ability has clearly come into question given the weakening fiscal position of the sovereign.

KEY RATING DRIVERS - 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 - 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.

KEY RATING DRIVERS SENSITIVITIES - SUBORDINATED DEBT RATING

BNTB's subordinated debt is rated 'BB+' notch one below its VR to reflect loss severity and an assessment of increment non-performance risk. The debt rating has been affirmed due to the affirmation of the bank's VR.

RATING SENSITIVITIES - SUBORDINATED DEBT RATING

BNTB's subordinated debt ratings are notched down from the VR and typically sensitive to any change in the bank's VR as well as broadly sensitive to the same considerations that might affect its VR.

Fitch has affirmed 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-'.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

-'Global Bank Rating Criteria' (March 20, 2015);

--Sovereign Support for Banks' (March 27, 2014);

-- Fitch Downgrades Bermuda's Ratings to 'A+'; Outlook Stable (May 30, 2014);

--'Bank of NT Butterfield & Son Limited' (December 22, 2014).

Applicable Criteria and Related Research:

Global Bank Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=819048

Sovereign Support For Banks: Rating Path Expectations

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741975

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983741

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings, Inc.
Primary Analyst
Doriana Gamboa
Senior Director
+1-212-908-0865
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1 212-908-0771
or
Media Relations
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Elizabeth Fogerty, +1-212-908-0526
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Source: Fitch Ratings

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