Thomson Bankwatch, the world's largest bank rating agency.

Thomson has downgraded the bank's senior debt rating to `A plus' from `AA minus'. The agency blamed poor supervision of the company's London operations and a subsequent total of $50 million in special charges against net income as the main reasons for the downgrade.

However Thomson noted at the core the bank's position remained strong.

The downgrade comes on the heels of the bank's announcement it was increasing by $33 million provisions for potential losses connected with exiting former operations in the UK -- a Slough-based subsidiary and a London branch which were closed last year.

Bank of Butterfield had previously taken a charge in the previous financial year of about $20.1 million for exiting London and Singapore operations.

Thomson stated about $17 million was due to the London operations.

"The downgrade is related to deterioration in capital levels and poor earnings performance for the past two fiscal years,'' Thomson Bankwatch stated. "While core earnings have remained relatively good, Butterfield has reported very weak overall net income as a result of special charges associated with closing down its London operations. In the past, London suffered from an apparent lack of supervision and aggressive lending.'' Thomson analysts also noted the bank was taking a $30 million special reserve to comply with new Canadian accounting rules relating to benefits for retirees.

"The company's Tier 1 ratio has declined over the past two years due to lower earnings and a share buyback programme,'' they said. "Nonetheless, the company's balance sheet is strong, as it remains dominated by highly liquid interbank placements and investment securities. Loans comprise approximately 23 percent of total assets. In addition, the core earnings of the company appear to be solid as evidenced by strong increases in fee-related revenues.'' The additional provision is projected to bring the company's profit down to $5 million for the year ended June 30, bank President and Chief Executive Officer Calum Johnston said last week. That's a 50 percent drop from the $10.4 million profit recorded in the previous financial year when the company took a one-time charge of $20.6 million against what would have been $31 million in earnings.

In the 1996 financial year, the bank reported profits of $29 million.

"Given the company's performance relative to its peers, the reduced Tier 1 capital position, and the challenges that Butterfield will face in fiscal year 1999 (i.e. high cost operational structure and competition), Thomson Bankwatch believes that the company is now more appropriately rated,'' the analysts said.

Last week Fitch IBCA downgraded the bank's long-term rating to "A'' from "A plus''. Moody's has the bank at `A3', equivalent to Fitch's "A''.

Moody's based its rating on the bank's strong capital position, low-risk balance sheet and "fairly stable'' operating environment.

The Bank of Bermuda has a Thomson senior debt rating of "AA minus'', a Fitch long term rating of "A plus'', and a Moody's rating of `A2'.