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Rating Action:

Moody's affirms N.T. Butterfield's A3 long-term deposit rating; outlook changed to stable from positive

27 Mar 2020

Toronto, March 27, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the baa2 baseline credit assessment (BCA), the A3 long-term issuer and deposit, and subordinated debt ratings, the A2(cr) counterparty risk assessment and the A2 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 stable from positive.

The ratings affirmation reflects Moody's unchanged assessment of Butterfield's standalone credit profile, support and structural analysis, including its expectations of government support. The change in ratings outlook reflects Moody's assessment that the Bermudian economy will slow over the next 12 to 18 months from reduced consumer spending and a slowdown in tourism-related activity as a result of the coronavirus outbreak; which will likely have a direct negative impact on Butterfield's asset quality and profitability.

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, Stable from Positive

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

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

..Subordinated Debt Rating: Affirmed at A3

..Subordinated Shelf: 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 stable from positive

RATINGS RATIONALE

Moody's said that the affirmation of Butterfield's baa2 BCA and the ratings reflects the bank's strong domestic franchise that supports healthy core profitability, strong capitalization that provides a cushion against unexpected losses and a highly liquid balance sheet that mitigates the lack of a lender of last resort. These credit strengths are tempered by the risks resulting from the single name concentrations in both Butterfield's loan and deposit portfolio, product concentrations in residential mortgages, and lack of domestic lending opportunities that encourages the bank to incur strategic acquisition risks by pursuing opportunities away from its core franchise market; albeit with associated diversification benefits.

While the bank's credit quality and geographic diversification has improved in recent years, Moody's believes these positive pressures have abated because of more challenging operating conditions due to the coronavirus outbreak.

In changing the rating outlook to stable from positive, Moody's noted the global spread of the coronavirus is resulting in simultaneous supply and demand shocks. These shocks are expected to materially slow economic activity, globally and in Bermuda, particularly in the first half of this year. Fear of contagion will dampen consumer and business activity and the longer it takes for households and businesses to resume normal activity, the greater the economic impact. Fiscal and monetary policy measures will likely help limit the damage in individual economies. Policy announcements from fiscal authorities, central banks and international organizations so far suggest that policy response is likely to be strong in affected countries. That said, Moody's notes Bermuda does not have the ability to provide monetary support to its economy as it does not have a central bank.

Moody's expects Butterfield's credit quality to deteriorate modestly over the next 12-18 months as economic and business activity slows and unemployment rises. A travel ban enacted on 20 March 2020, as well as self-quarantine and social distancing requirements, will have an immediate adverse impact on the island's tourism and consumer sectors. Moody's expects the bank's problem loans to rise modestly during 2020 and could become more acute as the pandemic situation becomes protracted.

In addition to higher expected credit costs, Moody's also noted that almost three-quarters of Butterfield's revenue is net interest income and the bank has a high proportion of variable rate assets, largely thanks to a high proportion of liquid assets. The bank is comparably more sensitive to interest rate declines that other banks with more diversified sources of revenue. As a result, Moody's expects the bank's profitability to decline during 2020 with the recent fall in interest rates.

Butterfield has substantial capital and liquidity buffers to absorb unexpected losses. With a tangible common equity to risk-weighted asset ratio of over 17% as of 31 December 2019, the bank's capital levels are comparably higher than banks in many other jurisdictions. Moody's believes this level of capital is sufficient to buffer the expected stress in the near-term from lower profitability which will reduce internal capital generation. As well, while Bermuda does not have a lender of last resort, as noted, the bank's liquid assets to tangible banking assets ratio of over 60% as at 31 December 2019 is comparably higher than banks many other jurisdictions.

The bank has a low reliance on confidence-sensitive market funding as evidenced by a low ratio of market funds to tangible banking assets of 0.2% as of year-end 2019, and a strong core deposit franchise as the largest bank in Bermuda. While Butterfield has concentrations in its deposit base, Moody's believes its dominant franchise position in Bermuda will keep its funding profile stable during this stress.

Moody's believes Butterfield's exposure to environmental risks is moderate, which is higher than its general assessment for the global banking sector, because of the bank's concentrated lending to individual sectors on the island of Bermuda, which is susceptible to hurricanes on an annual basis. These risks are largely captured in Moody's considerations of Asset Risk and Profitability measures because of the potential for credit quality deterioration as borrowers are unable to repay loans after a hurricane-related disaster. Bank of N.T. Butterfield and Son's exposure to social risks is moderate, consistent with our general assessment for the global banking sector.

Governance risks are largely internal rather than externally driven. Moody's does not have any particular concerns with Butterfield's governance. Nonetheless, corporate governance remains a key consideration in Butterfield's ratings.

WHAT COULD CHANGE THE RATING UP

Upward rating pressure could emerge if loan asset quality remains stable or improves and high capital levels are sustained. Reduced single borrower concentrations would also be positive for the ratings. An upgrade of the BCA would result in a upgrade of the long-term issuer and deposit ratings.

WHAT COULD CHANGE THE RATING DOWN

Downward rating pressure could emerge if the bank's asset quality, capital, or liquidity deteriorates significantly. A deterioration in the economic outlook for Bermuda would also be negative for the ratings.

A downgrade of the BCA would result in a downgrade of the long-term issuer and deposit ratings.

Butterfield is a full service bank and wealth manager headquartered in Hamilton, Bermuda, with total assets of $13.9 billion as of 31 December 2019.

The principal methodology used in these ratings was Banks Methodology published in November 2019. 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.
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