Ratings agency Moody's has put Butterfield Bank's bank financial strength and long-term debt ratings on review for possible downgrade.

Moody's said the move was prompted by its earlier decision, announced on Monday, to put the Government of Bermuda on review for possible downgrade.

The agency also cited Butterfield's $95 million fourth-quarter loss, caused in part by write-downs on its investment portfolio — something Moody's expects to continue as the financial crisis unfolds.

Moody's rates Butterfield at C for bank financial strength (BFSR), Aa3 for long-term deposits and A1 for subordinate debt. The Prime-1 short-term deposit rating was affirmed.

The bank has received support from Government, in the form of a guarantee on the principal and dividends of $200 million of preferred shares being issued by the bank to raise capital.

Government has also agreed to buy any of the stock not bought by the private sector by the end of June.

The money was needed to ensure the bank has a sufficient "capital buffer" — as required by regulator the Bermuda Monetary Authority — to withstand the effects of a severe economic downturn.

Moody's said its ratings review will focus on the outcome of the review of the Government's ratings, and the extent to which potential write-downs in Butterfield's securities portfolio are likely to weaken its capital ratios.

The ratings agency said the bank's $95 million fourth quarter's loss was driven largely by write-downs of securities in its "comparatively large securities portfolio" and that Butterfield's regulatory capital ratios had weakened as a result.

The statement continued: "Moody's notes that the forthcoming $200 million issuance of preferred stock that will be guaranteed by the Government of Bermuda should help restore the company's capital cushion to absorb potential losses in the future.

"However, Moody's also expects losses on the securities portfolio to increase as the financial crisis unfolds, which could erode the capital cushion."

Moody's said that any downgrade of the Government's bond ratings — currently under review for possible downgrade — could result in a downgrade for the bank.

Under the agency's Joint Default Analysis methodology, Butterfield's long-term deposit and debt ratings are three notches higher than they otherwise would be, "because of lift for the systemic support Moody's expects would be forthcoming [from Government] in the event such support is needed".