Bermuda Commercial Bank’s credit rating has been downgraded by Moody’s because of increasing risk associated with the bank’s expanding investment portfolio.In downgrading BCB’s long-term deposit rating to Ba2 from Baa3, Moody’s noted the bank’s investment portfolio had risen from five percent of total assets at March 31, 2010 to 45 percent two years later.“As well, a sizeable portion of this portfolio is invested in equities and unrated or non-investment grade rated debt securities that provide current revenue and income benefits in excess of BCB’s historical, conservative investments, but that also expose the firm to considerable risks,” Moody’s added in its commentary.Moody’s noted that the investment portfolio value was approximately three times tangible common equity at the end of the first quarter of this year.Some of the investments have been in Bermuda Stock Exchange-listed companies. BCB announced in February this year that after a major transaction, it owned nearly 7.5 percent of telecommunications group KeyTech Ltd. At the time, it also owned more than 40 percent of property developer West Hamilton Holdings Ltd, which plans to build the Belvedere Place office complex on Pitts Bay Road.“BCB’s capital position and liquidity pool are currently quite healthy,” Moody’s added. “However, its securities portfolio concentration could lead to unexpected losses that could materially reduce its capital base and undermine confidence in the bank.“The downgrade also incorporates Moody’s view of the firm’s risk governance challenges that result from its ownership by Permanent Investment Limited (Permanent), as well as the management of its investment portfolio by ICM Limited, a minority shareholder with ties to Permanent.“In Moody’s opinion, this heightens risk that the bank could take on additional risks to generate higher returns on capital.“Moody’s outlook on BCB is stable at its new rating level, incorporating the asset and governance risks of the firm as well as its solid capital and liquidity positions.”Horst Finkbeiner, BCB’s director and chief operating officer said: “While disappointed with the downgrade we are pleased that our solid capital position and strong liquidity were recognised by Moody’s. We remain satisfied with the overall growth in our business and the performance of our portfolio”.BCB focuses purely on private wealth and corporate clients, providing banking, trust, asset and investment management, and corporate administration and services.“In March 2012 we published our half-year figures that showed that our balance sheet has strengthened year on year with shareholder equity at $93.56 million. Our profits have also improved, with earnings per share more than doubling from $0.20 per share in 2011, to $0.44 per share at half-year 2012,” Mr Finkbeiner said.“We are very pleased with the steady growth in our business franchise and our robust balance sheet.“The change in our rating is driven by the challenges in the global banking environment, particularly in Europe and with markets in general. This is something that the bank is managing closely and we have taken note of Moody’s comments on our investment portfolio. While our portfolio is well diversified and controlled we will continue to work with our investment adviser to monitor and reduce any concentration or exposure to the areas highlighted by Moody’s.”The bank’s statement said BCB follows a conservative approach to managing its balance sheet, and at half-year 2012 had a tier one capital ratio of 25.52 percent. Further over 50 percent of its assets are in cash and cash equivalents with no direct exposure to the troubled mortgage business.“We are pleased with our strong capital and liquidity position, and we look forward to continuing to grow our business in 2013,” Mr Finkbeiner added.