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Rating Action:

Moody's affirms Bank of N.T. Butterfield's A3 long-term issuer and deposit ratings; changes outlook to positive from stable

10 Oct 2019

NOTE: On October 21, 2019, the press release was corrected as follows: In the debt list, under Affirmation, the seventh line was changed to “Subordinate, Foreign Currency Shelf Rating: Affirmed at (P)A3.” Revised release follows.

Toronto, October 10, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the baa2 baseline credit assessment (BCA), A3 long-term issuer, deposit and subordinated debt ratings, the A2(cr)/Prime-1(cr) counterparty risk assessments and A2/Prime-1 counterparty risk ratings of The Bank of N.T. Butterfield & Son Ltd. (Butterfield). In the same rating action, Moody's changed the ratings outlook to positive from stable.

The ratings affirmation reflects Moody's unchanged assessment of Butterfield's standalone credit profile, support and structural analysis, including its assumptions of government support. The change in ratings outlook reflects Moody's assessment that the quality of Butterfield's loan portfolio is improving as the Bermudian economy continues to recover from a prolonged recession, as well as the bank's efforts to diversify the portfolio outside Bermuda to both the Channel Islands and Cayman Islands. The positive outlook also reflects the bank's increasing capitalization, affording greater protection to its creditors against unexpected losses.

The following rating actions were taken:

Affirmation:

.Issuer: The Bank of N.T. Butterfield & Son Ltd.

..Baseline Credit Assessment: affirmed at baa2

..Adjusted Baseline Credit Assessment: affirmed at baa2

..Issuer rating: affirmed at A3, Outlook changed to Positive from Stable

..Long-term Bank Deposit Rating: affirmed at A3, Outlook changed to Positive from Stable

..Short-term Bank Deposit Rating: affirmed at Prime-2

..Subordinate, Foreign Currency Debt Rating: Affirmed at A3

..Subordinate, Foreign Currency Shelf Rating: Affirmed at (P)A3

..Long-term Counterparty Risk Assessment: affirmed at A2(cr)

..Short-term Counterparty Risk Assessment: affirmed at Prime-1(cr)

..Long-term, Local Currency Counterparty Risk Rating: affirmed at A2

..Long-term, Foreign Currency Counterparty Risk Rating: affirmed at A2

..Short-term, Local Currency Counterparty Risk Rating: affirmed at Prime-1

..Short-term, Foreign Currency Counterparty Risk Rating: affirmed at Prime-1

Outlook Action:

.Issuer: The Bank of N.T. Butterfield & Son Ltd.

..Outlook, changed to positive from stable

RATINGS RATIONALE

Moody's said the affirmation of Butterfield's baa2 BCA and the ratings reflect its overall unchanged assessment of the banks' credit profile. The BCA is underpinned by the bank's strong domestic franchise in Bermuda that supports healthy core profitability, strong capitalization, and a highly liquid balance sheet. These credit strengths are tempered by concentrations in both Butterfield's loan and deposit portfolios and a lack of domestic lending opportunities that encourages the bank to incur strategic acquisition risks by pursuing opportunities away from its core franchise market.

In changing the rating outlook to positive from stable, Moody's noted Butterfield's loan portfolio is becoming less concentrated to borrowers in Bermuda. Over the past several years, Butterfield has diversified its business profile away from Bermuda; most recently with its purchase of ABN AMRO (Channel Islands) Ltd.

The performance of Butterfield's core Bermuda loan portfolio has been improving over the past several years as the island's economy emerged from a recession in 2016. Net charge-offs to gross loans were 0.08% for the year ended 2018, compared to 0.25% for the same period in 2016.

Butterfield has sizable single name concentrations, primarily in its commercial real estate (CRE) portfolio; largely a reflection of operating in small economies and therefore subject to less granular CRE opportunities relative to, for instance, US regional banking peers. Single name exposures heighten the bank's vulnerability to outsized losses should the credit quality of a large borrower deteriorate, in Moody's view. That said, as a dominant incumbent in Bermuda, Butterfield has deep relationships with these borrowers; allowing the bank to keep abreast of adverse borrower development at an early stage.

Moody's also noted Butterfield's capital levels have been increasing in recent years; improving the bank's ability to withstand unexpected losses. The bank's tangible common equity to risk-weighted assets ratio increased to almost 20% as of 30 June 2019 from just over 15% as at 31 December 2016.

Butterfield has a strong liquidity and funding profile as evidenced by a healthy Liquid Banking Assets/Tangible Banking Assets ratio of almost 60% as at 30 June 2019. As well, the bank's funding profile benefits from low reliance on confidence-sensitive market funding, a low loan-to-deposit ratio of 43% as of year-end 2018, and a strong core deposit franchise as the largest bank in Bermuda.

Moody's believes Butterfield's exposure to environmental risks is moderate, which is higher than its general assessment for the global banking sector. The bulk of Butterfield's loan portfolio is in Bermuda and the Cayman Islands; countries susceptible to hurricanes. Moody's considers this risk in its assessment of Butterfield's asset risk and profitability as it believes a hurricane-related disaster will disrupt the ability of the bank's customers to repay loans for a period of time. Butterfield's exposure to social risks is moderate, consistent with our general assessment for the global banking sector. As well, governance risks are largely internal rather than externally driven. Moody's does not have any particular concerns with Butterfield's governance.

WHAT COULD CHANGE THE RATING UP

Butterfield's BCA could be upgraded if: 1) loan asset quality remain stabilized at current levels; 2) Moody's assesses the single-name concentrations of the bank's borrowers and/or depositors has become a smaller proportion of the bank's loan portfolio; and/or 3) high capital levels are sustained.

An upgrade of the BCA would likely result in an upgrade of the long-term issuer, deposit and subordinated debt ratings. As well, an upgrade in the rating of the Government of Bermuda could change Moody's assumptions of government support, which could also lead to a ratings upgrade.

WHAT COULD CHANGE THE RATING DOWN

The positive outlook indicates that ratings downgrades are unlikely. However, downward rating pressure could emerge if the bank's asset quality and/or capital levels deteriorate significantly.

A downgrade of the BCA would likely result in a downgrade of the long-term issuer and deposit ratings. As well, a downgrade in the rating of Government of Bermuda could change Moody's assumptions of government support, which would also lead to a ratings downgrade.

Butterfield is a full service bank and wealth manager headquartered in Hamilton, Bermuda, with total assets of $11.2 billion as of 30 June 2019.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jason Mercer
Vice President - Senior Analyst
Financial Institutions Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

M. Celina Vansetti-Hutchins
MD - Banking
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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