Butterfield Bank's financial strength rating has been cut by credit rating agency Moody's.

Moody's lowered Butterfield's Bank Financial Strength Rating (BFSR) to C- from C, citing possible weakening on the bank's capital ratios in 2009, as Butterfield may need to make further write-downs of securities held in its investment portfolio.

Moody's also lowered the bank's long-term deposit rating by one notch to A1 from Aa3, which indicates that Butterfield's long-term obligations are subject to low credit risk. Its subordinate debt rating was lowered to A2 from A1.

The short-term deposit rating was affirmed at the highest possible level of Prime-1, reflecting a superior ability for repayment of senior, short-term debt obligations. The outlook is stable.

Butterfield is soon to raise $200 million in capital in a Government-guaranteed issuance of preferred stock, which Moody's said will "boost the company's capital cushion to absorb potential losses in the future".

And the rating agency added its opinion that the bank enjoys a "very high level of systemic support", which was exemplified by the Government guarantee of the capital raise and its agreement to purchase preferred shares not subscribed by the private sector.

But Moody's added that Butterfield could incur further marks on the securities portfolio, particularly from complex financial instruments, including collateralised debt obligations (CDOs) and structured investment vehicles (SIVs).

Last year, Butterfield had to mark down the value of such investments by tens of millions of dollars, because they were tied to the value of assets including US mortgages, which plunged in value on the back of a property market slump.

"Butterfield reported a $95 million net loss for the fourth quarter of 2008 that reduced its net income for the year to just $5 million," Moody's said.

"The quarterly loss was driven largely by write-downs of securities, which comprise a comparatively large proportion of its total assets. These write-downs, together with other losses and gains recorded in the quarter, weakened Butterfield's regulatory capital ratios and its ratio of tangible common equity to risk-weighted assets."

Butterfield Bank president and chief executive officer Alan Thompson said the lowering of the bank's long-term ratings was "not necessarily unanticipated", given the current economic environment.

"It is significant that Moody's has affirmed our short-term customer deposit rating at the highest possible level and established the outlook for Butterfield as stable," Mr. Thompson said.

"We enjoy a very high level of systemic support in Bermuda and we remain well positioned to serve our customers and navigate the ongoing dislocation in global financial markets."

The action announced yesterday concludes Moody's review of Butterfield's ratings, which started on March 17.