KBRA Affirms Ratings for The Bank of N.T. Butterfield & Son Limited
12 Jul 2024 | New York
KBRA affirms the senior unsecured debt and deposit ratings of A+, the subordinated debt rating of A, and the short-term debt and deposit ratings of K1 for Hamilton, Bermuda-based The Bank of N.T. Butterfield & Son Limited (NYSE: NTB or “the bank”). The Outlook for all long-term ratings is Stable. NTB has operations in four key jurisdictions, Bermuda, Cayman, United Kingdom, and the Channel Islands.
The ratings remain underpinned by NTB's strong financial profile, which is characterized by a liquid balance sheet (low RWA density), historically modest cost of funds, diversified mix of noninterest revenues, and solid risk-adjusted equity capitalization.
Cash, short-term investments, and investment securities that are backed by the U.S. government and its enterprises represented approximately 60% of total assets at 1Q24. Residential loans constituted another 24% of total assets.
The deposit base, while somewhat lumpy, continues to exhibit relatively stability; notably, since 4Q22, about the time when U.S. deposits costs began to rise from very low levels, total deposits have declined by a modest 8% (virtually all of the decline occurred in 4Q23), while the mix of noninterest-bearing deposits remains essentially unchanged at 22% of total deposits.
Earnings performance, propelled by substantial noninterest income contribution, has been solid for an extended period, especially measured on a risk-adjusted basis. Relative to similarly rated banks at KBRA, NTB has outperformed on NIM and bottom line earnings performance metrics since YE2022, roughly when the Federal Reserve changed its monetary posture.
While risk-adjusted regulatory capitals remain robust (CET1 ratio of 22.6% at 1Q24) and are expected to remain in current ranges, KBRA notes that the combined investment portfolio currently exhibits unrealized MTM losses of $731 million (about 5% of total assets).
NTB’s policy is to maintain cash and short-term investments equivalent to at least 20% of total deposits, especially given the limited deposit insurance scheme in Bermuda and the absence of central bank support in its three deposit gathering locations, Bermuda, Cayman, and Channel Islands. The level in 1Q24 was 27%.
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