Fitch Affirms Bermuda Commercial Bank's L-T IDR at 'BBB-'; Ratings Outlook Remains Negative
Fitch Ratings has affirmed the Long- and Short-term Issuer Default Ratings (IDRs) of Bermuda Commercial Bank (BCB) at 'BBB-/F3'. The Ratings Outlook remains Negative. A complete list of ratings follows at the end of this release.
RATING DRIVERS AND SENSITIVITIES - VRs & IDRs
The affirmation of BCB's IDRs reflects the company's liquid balance sheet, which is significantly more liquid than its Bermuda counterparts, and the company's strong capital position with Tier 1 Capital at 26.42%. The Negative Outlook continues to reflect Fitch's concerns with concentrations in BCB's investment portfolio, such as relatively high individual positions as well as European and financial sector holdings.
Fitch notes that BCB operates with a significant amount of liquidity on a comparative basis to most global banks. Average cash on hand accounts for more than 40% of the total asset and total deposit base. Fitch also considers BCB's capital levels, on a tangible and risk adjusted basis to be strong. Fitch Core Capital Ratio was in excess of 26%, and Fitch continues to believe that BCB should maintain high levels of capital principally due to the bank's size, limited diversity and customer concentrations in its deposits profile.
Fitch notes that management has been proactive in enhancing its non-interest revenue stream. Although BCB's fee-based income is still fairly limited and earnings are ultimately spread driven, the company's acquisitions (Paragon Trust and Charter Corporate Services) have had some positive impacts.
Fitch makes various adjustments to BCB's reported earnings related to gain on investments and investments in associates. Excluding these items, non-interest income increased 162% from the prior year-end. Fitch also noted that fee-based revenue for 2012 reflected 25% of total revenue, up from 17% in the prior year. Fitch expects more normalized growth in 2013 as BCB pursues opportunities within the small business community on the island.
Although BCB is not exposed to credit risk given the nature of its balance sheet with minimal loans, the company is exposed to market and credit risks within its securities portfolio. Fitch continues to maintain reservations on concentration risk in BCB's investment portfolio relative to the company's capital base. Further, the largest exposures represent a sizable portion of BCB's total equity on an absolute basis.
Although Fitch recognizes BCB's efforts to reduce European bank holding concentrations in its investment securities portfolio, total UK and European exposure remains elevated, accounting for almost 30% of the investment book. Fitch would also positively view actions taken by management to enhance its risk governance structure related to its investment portfolio.
Fitch believes the current ratings are at the higher-end of their potential range given BCB's scale of operations and limited diversity. A downgrade could occur if BCB experienced a considerable reduction in liquidity or capital ratios, significant increases in credit or market risks including a rise in concentrations in the securities portfolio, and/or any acquisition that results in a shift toward a riskier business mix.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING
BCB has a Support Ratings of '5' and Support Floor Rating of 'NF'. In Fitch's view, BCB is not systemically important in the local Bermuda market and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any support for BCB.
Fitch has affirmed the following ratings:
Bermuda Commercial Bank
--Long-term IDR at 'BBB-'; Outlook Negative
--Short-term IDR at `F3';
--Viability Rating at 'bbb-'
--Support at `5';
--Support Floor at `NF'.
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);
--'Bermuda Full Rating Report' (July 18, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Rating FI Subsidiaries and Holding Companies
Risk Radar October 2012
Doriana Gamboa, +1-212-908-0369
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Sarim Khan, +1-312-368-5459
Christopher D. Wolfe, +1-212-908-0771
Brian Bertsch, +1-212-908-0549
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