Bermuda's banking sector saw its profitability improve in the third quarter for the second successive three-month period — but deposits tumbled by $500 million.

The second edition of financial regulator the Bermuda Monetary Authority's Quarterly Banking Digest — an e-publication issuing detailed information on the Island's banking sector — showed the banks continued to benefit from the spread between how much it costs them to borrow money and how much interest they can charge to lend it out, as well as from cost-cutting.

Their profitability improved in the third quarter, as return on equity climbed to 7.9 percent, up 0.8 percent from the preceding three months, suggesting that the banks are continuing to heal in the wake of global liquidity crisis that shook the industry worldwide.

But the banks also saw their total assets fall by three percent, mostly due to a fall in foreign-exchange denominated deposits.

And there was also a slight increase in the number of non-performing loans, indicating that more borrowers fell behind on repayments.

The sector's total deposits at September 30 this year were $17.8 billion — down $500 million, or 2.8 percent, from June 30, and 14.4 percent down from a year earlier.

The digest commentary explained: "The quarter-on-quarter decrease was mainly driven by decreases in time deposits of 6.6 percent and is attributable to decreases in FX (foreign exchange) denominated customer deposits of 3.8 percent during the quarter and 17.6 percent year on year."

Almost four dollars out of every five (78.6 percent) held as deposits in Bermuda's banks are denominated in foreign currencies. US dollar assets make up 62.2 percent of total foreign currency-denominated assets and 45.5 percent of the sector's total assets.

Non-performing loans — those with repayments delayed 31 days or more — rose to 3.2 percent of total loans on the banks' books, from 3.1 percent in the second quarter, and 2.0 percent a year earlier.

The digest states that the high level of loans that continue to perform compares well with many other jurisdictions and adds: "Such levels reflect the conservative nature of the sector's loan portfolio and underwriting practices."

Earlier this year Butterfield Bank raised $200 million in an issuance of preference shares and Capital G Bank also benefited from a $20 million capital injection from its parent company.

The BMA said the recapitalisation effort had benefited the sectors risk asset ratio — total regulatory capital divided by total risk-weighted assets — which remained high at 17.2 percent, despite falling from 17.7 percent during the third quarter.